A due on sale clause is a certain clause that is sometimes used in the world of home loans and mortgages. The provision requires that the borrower repay the lender in its entirety if and when a property is sold. The lender may choose whether to exercise this option and there are times when the lender cannot legally make use of it. It is important to note that the due on sale clause cannot be invoked in cases of inheritance, divorce, or separation.
The due on sale clause is a very common clause in mortgage contracts in the United States. The purpose of the clause is to protect lenders from problematic borrowers. It prevents the borrower from selling the property before covering the remaining balance of a mortgage. In case a borrower attempts to sell a property without paying back the remaining loan amount, the lender can foreclose the property.
A lender may choose not to invoke the clause in certain cases. This includes a very weak housing market and rare cases where a property depreciated sharply in value.
Prior to the introduction of due on sales clauses in the 1980’s most mortgages were assumable mortgages. With assumable mortgages, the remaining debt amount of the mortgage was transferred to the new owner at the time of purchase. This essentially transferred the mortgage along with the home to new owner.
Due on sale clauses were initially implemented in the early 1980s to protect lenders from increasing mortgage rates. Banks and lenders force due on sales clauses to finalize mortgages that were issued with low interest rates. This was done in order to issue new mortgages with higher interest rates.