What is the alienation clause in real estate and how does it work?

Most lenders include an alienation clause (also called the “due-on-sale clause”) in their mortgage contracts to protect their interests in case you hand off the title of your home to someone else. Here are the main points you should know about the alienation clause, including what it is, how it works, when it applies and when it doesn’t.

What is an alienation clause?

How does the alienation clause work

Typically, when a mortgaged property transfers ownership, an alienation clause requires the previous owner to repay the loan’s remaining balance right away. Any proceeds from the sale go to the lender first to cover the leftover principal and accrued interest of unpaid mortgage.

A crucial component of the due-on-sale clause is that the homeowner cannot transfer their existing mortgage loan to the new buyer. Instead, the new owner must obtain a new mortgage and financing with current terms. It’s up to the lender to decide if they’ll enforce the alienation clause.

Alienation vs. acceleration clause

Both alienation clauses and acceleration clauses give lenders the authority and discretion to demand a mortgage balance be immediately paid off in full.

However, while alienation clauses generally apply to instances of transfer or sale, an acceleration clause is applied when you fail to meet the terms of your loan agreement.

Why do lenders use the alienation clause?

Your mortgage lender uses both the property title and mortgage clauses – such as the alienation clause – to ensure their interests are secure. For example, your lender provides you a loan in exchange for the title, which the lender then uses as collateral while you repay the loan.

Similarly, your lender uses the alienation clause to ensure they make back the money you borrowed even when you sell or transfer ownership of your home.

The 1982 Garn-St. Germain Act made alienation clauses enforceable. Since then, lenders have used the clause as insurance that borrowers will repay their loans. An alienation clause also prevents new buyers from assuming the previous owner’s interest rate, which would likely be lower than current mortgage rates.

If you have any questions or concerns about the alienation clause in your specific loan, contact your lender and get answers before proceeding with any transactions.

Are there exceptions for alienation in real estate?

While alienation clauses are standard in most mortgage contracts, they’re not in each one nor are they always enforceable.

Here are a few situations where a due-on-sale clause is not enforceable:

• Assumable mortgages: Loans that lack alienation clauses are called assumable mortgages. They allow a new buyer to take over the previous owner’s old mortgage. The new owner does not have to immediately 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 liability waiver.
• Transfer to a living trust: The original borrower can 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 unenforceable when the title is left 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.

Common FAQs about the alienation clause

Examining some commonly asked questions about the alienation clause can provide insightful information.

If I’m a veteran with a VA loan, will I be subject to the alienation clause?

Department of Veterans Affairs (VA) mortgage loans, as well as Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and other government loans, are considered assumable mortgages and aren’t subject to the alienation clause.

What else can trigger the alienation clause?

In addition to the sale or transfer of the property, a borrower might trigger the clause by not paying property taxes, not paying their homeowner’s insurance or by declaring bankruptcy.

Can there be an alienation clause in a lease?

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.