What Is The Alienation Clause (Or Due-On-Sale Clause)?
Ashley Kilroy4-minute read
April 26, 2022
Real estate is a whirlwind of terms and phrases. You may be researching what your future mortgage will involve for your next home or property. One factor that could indicate whether this mortgage is right for you is the existence of a due-on-sale clause, also known as an alienation clause.
However, it’s not enough to be familiar. Most lenders include an alienation clause in their mortgage contracts to protect their interests before you can hand off the title of your home to someone else. Here are the main points you should know about the alienation clause, when it applies and when it doesn’t.
What Is An Alienation Clause?
An alienation clause, also known as a due-on-sale clause, is a real estate agreement that requires a borrower to pay the remainder of their mortgage loan off immediately during the sale or transfer of a property title and before a new buyer can take ownership. It goes into effect regardless of whether the transfer is voluntary or not. This clause is standard in most mortgage agreements today.
In real estate, your lender provides you a loan in exchange for the property title, which the lender then uses as collateral. So, it’s a measure of protection for them while you repay the loan. Likewise, they use mortgage clauses like the alienation clause to further protect themselves. It ensures that they make back the money you borrowed even when you go to sell or transfer ownership of your home. Overall, your lender uses both the title and mortgage clauses as a way to ensure their interests are secure.
However, many lenders don’t actively enforce the due-on-sale clause when the property hasn’t been actually sold yet. So, many borrowers don’t look for permission when they deed the property elsewhere, like to a trust. There may be many other situations where you need a deed to alter the title of your home or property to fit a new situation. While some situations may not require permission, others will. Therefore, it may be better to check with your lender before making any decisions.
How Does The Alienation Clause Work?
Typically, when a mortgaged property transfers ownership, a due-on-sale clause, or alienation clause, it requires the previous owner to repay the loan’s full amount right away. Therefore, any proceeds from the sale go to the lender first to cover the leftover principal and accrued interest of your unpaid mortgage. Also, a crucial component of the due-on-sale clause is that the homeowner cannot transfer their existing loan to the new buyer. Instead, the new owner must obtain their own loan and financing with current terms. It’s up to the lender if they enforce the alienation clause.
An alienation clause is a typical part of the home selling process, although it is technically a form of acceleration clauses. These types of clauses are applied when you fail to meet the terms of your loan agreement. For example, if you miss regularly scheduled loan payments, your lender can initiate an acceleration clause that acts as a demand for immediate repayment. If you fail to do so, the property may go into foreclosure.
Why Lenders Use This Clause
The 1982 Garn-St. Germain Act made alienation clauses enforceable following the 1970s, where lenders could only enforce due-on-sales clauses when they could prove the transfer demonstrably harmed the lender’s security in the property. Ever since, lenders have used the clause as insurance that borrowers will repay the money owed to them. It also prevents new buyers from assuming the previous owner’s, likely lower, current mortgage rates.
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What Are The Exceptions?
While alienation clauses are standard in most mortgage contracts, they’re not in each one nor are they always enforceable. If your mortgage doesn’t fall into this category, it might be the alternative assumable mortgage. In that case, a new buyer can take over the previous owner’s mortgage. Naturally, these don’t have an alienation clause.
There are a few situations where a due-on-sale clause is not enforceable. Here are some instances where this may apply:
- Assumable mortgages: Loans that predate the 1970s and lack alienation clauses are called assumable mortgages, meaning they are transferrable to another buyer. The new owner does not have to pay off the mortgage.
- Second mortgage: If the owner takes out a second mortgage, such as a home equity loan, the primary lender cannot demand a release of liability.
- Transfer to a living trust: Garn-St. Germain allows borrowers to transfer the property into a living trust as long as they’re the occupant and trust beneficiary.
- Divorce: Lenders cannot enforce a due-on-sale clause when the property transfers as part of a divorce.
- Death: The alienation clause is nonenforceable if the title is left through a life estate to (or is inherited by) a spouse, child, or relative already occupying or intending to occupy the property.
- Joint tenancy: A lender cannot take advantage of the clause if a joint tenant (like a surviving spouse) takes over the mortgage.
The Bottom Line: Don’t Be Afraid Of Alienation Clauses
While alienation clauses may sound daunting, they are a normal provision in almost every mortgage contract. In fact, you’re much more likely to see them than any type of assumable mortgage that wouldn’t include them. However, like many other clauses, an alienation clause is designed to protect your lender. So, it’s important for any current or future home buyer to understand how these policies work before they decide on their next home purchase.
You don’t have to take on the world of real estate on your own, though. Explore our mortgage basics section to learn more about navigating mortgage clauses.
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