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Due-On-Sale Clause

A “Due-On-Sale Clause” is a provision in a mortgage or deed of trust contract with a lender that states the loan must be paid in full upon the sale or transfer of the property. This clause helps the lender mitigate risk by preventing the mortgage from being transferred when the property is sold, which could potentially occur without their knowledge.

Without a due-on-sale clause, a borrower might be able to transfer their mortgage to another party without the lender’s consent. However, with a due-on-sale clause in place, if the borrower tries to sell or transfer their property, they will have to pay off the existing loan in full. The new owner would then need to secure their own financing, allowing the lender to vet the new borrower and set terms that reflect the current market conditions.

Investors in the real estate industry need to be aware of this clause, especially when considering purchasing properties with existing financing or when thinking about selling a property with a mortgage. Violating a due-on-sale clause could have serious financial consequences, including the possibility of the lender demanding immediate payment of the full outstanding balance.