If you’ve ever taken out a mortgage, you’ve likely signed off on numerous terms and conditions and signed what felt like hundreds of documents. If you’re like most people, you didn’t pay attention to any of it, let alone the details. One key provision found in nearly every mortgage is the due-on-sale clause. Though it might sound intimidating, understanding what it is and how it works will give you greater confidence when navigating real estate, especially if you’re interested in creative financing strategies like subto deals like we are.
What is the Due on Sale Clause?
The due-on-sale clause, sometimes referred to as an acceleration clause, is a standard provision in most mortgage agreements. It allows the lender to demand the full repayment of the outstanding loan balance if the property is sold or transferred to a new owner without their consent. Essentially, it gives the lender the right to “call the loan due” if ownership of the property changes.
Example:
If you sell your home while a mortgage is still active, the bank could, in theory, demand that you pay the remaining balance of the loan immediately rather than continuing with monthly payments. The due on sale clause is designed to protect the lender’s interest in the property.
Why Does the Due on Sale Clause Exist?
The due on sale clause was introduced to ensure that banks and other lending institutions maintain control over their loans in order to ensure that the lender knows exactly who owns the property and who is responsible for the mortgage. Without this clause, the property could change hands without the lender’s knowledge or consent. It also functions as to ensure the new owner can meet the financial obligations of the mortgage. The clause protects them from an unqualified buyer taking over the payments, which could increase the likelihood of default.
Is the Due on Sale Clause in Every Mortgage?
In the vast majority of cases, yes. Almost all conventional mortgage loans in the United States contain a due on sale clause. Whether it’s an FHA, VA, or conventional loan, you’ll typically find this provision buried within the fine print of the mortgage agreement.
While this clause is standard, it can be especially important to understand if you’re exploring creative financing methods, such as Subject-To (Subto) deals, where you take over the mortgage payments while the loan stays in the original owner’s name.
What Happens if the Due on Sale Clause is Triggered?
If a lender enforces the due on sale clause, they can demand that the remaining loan balance be paid in full. If the borrower or the new owner can’t pay the balance, the lender could initiate foreclosure proceedings. This can be a worst-case scenario for those involved in a real estate transaction that didn’t account for the possibility of the clause being enforced.
Why the Due on Sale Clause is Rarely Enforced
Though the due on sale clause sounds like a major risk in creative real estate transactions, the reality is that it’s rarely enforced. Here’s why:
1. Your Mortgage Has Likely Been Sold
Most mortgage lenders don’t hold onto your loan for long. After the initial loan is closed, it’s typically packaged with other loans and sold to a large investment firm or financial institution. Once the mortgage is sold as part of a portfolio, the new loan holder isn’t concerned with who owns the property. They’re primarily interested in whether or not the payments are being made on time.
2. Lenders Prioritize Payments Over Ownership
For the institution managing your loan, the key concern is whether the mortgage payments are being made consistently. If the loan is current and payments are coming in, the lender has little incentive to enforce the due on sale clause. The goal is to avoid costly and time-consuming foreclosure proceedings as long as the loan is performing.
3. Calling the Loan Due Is Financially Risky for the Lender
Lenders face significant risks if they decide to enforce the due on sale clause. If they call the loan due, the borrower or new owner would have to pay the full balance immediately. If that isn’t feasible, the lender might be forced to foreclose on the property. This is expensive and time-consuming. Foreclosing on a property involves legal fees, maintenance costs, and potential loss of property value, which means lenders are often more interested in keeping the loan active and receiving steady monthly payments.
4. Monitoring Deed Transfers is Logistically Challenging
For a lender to enforce the due on sale clause, they would need to actively monitor public records in every county where they hold loans. This would require constantly checking county assessor’s offices to track ownership transfers—an enormous and expensive task given the number of properties tied to most lenders’ portfolios. Given the costs of this ongoing monitoring, most lenders simply don’t bother unless there’s a clear reason to scrutinize a specific property.
How to Avoid Triggering the Due on Sale Clause
While the due on sale clause is rarely enforced, there are steps you can take to further minimize the chances of it being triggered. The most important strategy is to ensure the mortgage payments are never late. As long as the lender is receiving timely payments, they are far less likely to scrutinize the property or ownership transfer.
In addition, it’s critical to make sure there is no gap in insurance coverage or tax or escrow payments. If property taxes or insurance payments (typically handled through escrow accounts) fall behind, the lender could become alerted that something is wrong and investigate the situation more closely, potentially uncovering the change in ownership. Staying current on both mortgage and escrow payments will keep the loan in good standing and avoid raising any red flags that could lead to the enforcement of the due on sale clause.
By keeping the payments seamless and the loan in good standing, you greatly reduce the likelihood that the lender will ever consider calling the loan due.
Final Thoughts: Should You Worry About the Due on Sale Clause?
While the due on sale clause is a legal tool lenders can use, it’s rarely enforced as long as payments are being made consistently. Lenders are generally more focused on receiving timely payments than on who owns the property. However, understanding this clause is important, especially if you’re exploring creative financing strategies like Subto.
If you’re interested in learning how to get started in real estate investing while avoiding the hassles and complexities, schedule a Zoom call with us! We’ll show you how you can get into real estate investing with us doing all the hard work—allowing you to grow your wealth without the stress of managing properties or dealing with legal technicalities.
Grove Family Investments 
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