Due on sale: Overview, definition, and example
What is "due on sale"?
"Due on sale" refers to a provision commonly found in mortgages or loan agreements that requires the full balance of the loan to be paid in full when the property securing the loan is sold or transferred to a new owner. This clause gives the lender the right to demand immediate repayment of the entire outstanding loan balance if the property is sold before the loan is fully paid off. The due on sale clause protects the lender by ensuring that the loan is either paid off or refinanced when the property changes hands.
For example, if a homeowner sells their house, the mortgage lender may invoke the "due on sale" clause to demand that the remaining balance of the mortgage be paid in full at the time of the sale.
Why is "due on sale" important?
The "due on sale" clause is important because it protects the lender from the risk of the borrower transferring the property to another party without fully paying off the loan. It ensures that the lender can either collect the remaining debt or refinance the loan if the property is sold. For lenders, the clause provides security and helps manage risk by ensuring that a new owner doesn't take over the loan without the lender’s approval or without fully securing the debt.
For borrowers, it is important to understand the implications of this clause, as it can affect the sale of the property. If the borrower intends to sell the property before the loan is paid off, they may need to ensure that the loan is refinanced or repaid at closing, which could impact the terms of the sale or the timing of the transaction.
Understanding "due on sale" through an example
Imagine a homeowner who has a mortgage with a "due on sale" clause. The homeowner decides to sell the property before the mortgage is fully paid off. Upon selling the home, the lender invokes the "due on sale" clause and demands that the entire remaining mortgage balance be paid at closing. This may require the homeowner to pay off the balance from the proceeds of the sale or secure a new loan to cover the remaining debt before transferring ownership of the property.
In another scenario, a borrower who is leasing property might not be able to transfer the lease without the lender’s approval if the lease agreement contains a "due on sale" clause. This protects the lender from losing their collateral or from the property being transferred to a new party who does not meet the lender's credit standards.
An example of a "due on sale" clause
Here’s how a "due on sale" clause might appear in a mortgage or loan agreement:
“In the event of the sale, transfer, or conveyance of the property securing this loan, the entire remaining balance of the loan shall become immediately due and payable. The Borrower shall not transfer the property without first obtaining the Lender’s consent or satisfying the loan in full.”
Conclusion
The "due on sale" clause is an important aspect of loan agreements and mortgages, providing lenders with a safeguard against the risk of loan transfer without repayment. It ensures that the debt is fully satisfied when the secured property changes ownership. For borrowers, understanding this provision is crucial, as it can affect their ability to sell or transfer the property before the loan is paid off, and may require them to address the loan balance at the time of the sale.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.