What Is The Alienation Clause (Or Due-On-Sale Clause) In Real Estate?

If you’re researching what your mortgage will involve for your next home or property, one factor that could indicate whether a mortgage is right for you is the existence of a due-on-sale clause, also known as an alienation clause.

Most lenders include an alienation clause in their mortgage contracts to protect their interests in the event that 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.

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 balance 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.

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.

Also, 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 that 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. 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.

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 that 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 following the 1970s, in which lenders could only enforce due-on-sales clauses when they could prove the transfer demonstrably harmed the lender’s security in the property.

Since then, lenders have used the clause as insurance that borrowers will repay the money owed to them. An alienation clause also prevents new buyers from assuming the previous owner’s interest rate, which would likely be lower than current mortgage rates.

However, because many lenders don’t actively enforce the due-on-sale clause when the property hasn’t been actually sold yet, many borrowers don’t look for permission when they deed the property elsewhere, like to a trust.

While some situations may not require permission from your lender to transfer your property, others will. For example, some scenarios may require a deed for you to alter the title of your home or property to fit a new situation. Be sure to check with your lender before making any decisions.

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. An assumable mortgage allows 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 release of liability.

• Transfer to a living trust: The Garn-St. Germain Act of 1982 allows the original borrower 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 unenforceable when the title, through a life estate, 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.

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 resources to learn more about navigating mortgage clauses and the home buying process as a whole.