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Definition of Due on Sale

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Definition: Almost every single loan generated to buy a home contains a due on sale clause. I don't know of any mortgages without a due on sale clause. A due on sale clause is important if a homeowner wants to sell the home without paying off the loan. A due on sale clause allows the existing lender to call the entire loan due and payable if the homeowner transfers title to the home without paying the loan in full.

A due on sale clause basically prevents a homeowner from selling subject to an exiting loan. It doesn't mean that people don't try to do it but it does mean the new homeowner might lose the home if the existing lender forecloses. Lenders have specific rights, and trust deeds and mortgages are written by lawyers in favor of the lenders. A due on sale clause is one of those rights inherent in the paperwork. You might have to read through 10 pages to find it, but the due on sale clause, also known as an acceleration clause, will be contained in almost all loans made after 1988.

Sample verbiage found in a mortgage for a one- to four-family dwelling is below:

Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.

Also Known As: alienation clause, acceleration clause
Examples:
John sold his home on a land contract, hoping to circumvent the due on sale clause, but the existing lender told him to pay off his loan or it would foreclose.

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