A due-on-sale clause is a term in a mortgage or deed of trust that lets the lender demand the whole remaining balance if the property is sold or transferred without the lender’s consent. The lender chooses whether to use it, so a transfer does not make the loan come due until the lender acts.
Which sale the clause is about
Note holders ask whether selling their note will set the clause off. The worry comes from mixing up two different sales.
| Event | What is being sold | Does the clause apply? |
|---|---|---|
| Your payer sells the house | The property | Yes. This is what the clause is written for. |
| You sell your note to an investor | The right to receive payments | No. The property has not changed hands. |
When you sell a note, your payer still owns the same property and owes the same debt on the same terms, and the only change is who receives the payments.
What the clause says and where to find it
The wording varies from one document to the next, but the idea holds: if the borrower sells or transfers the property, or an interest in it, without the lender agreeing first, the lender may call the loan. Calling the loan is also known as accelerating it, which means every remaining payment becomes due at once.
Because it is an option, the lender can enforce it, ignore it or consent to the transfer. Look for it in the mortgage or deed of trust, and sometimes in the note as well, under a heading such as “transfer of the property” or “acceleration on transfer”.
Why lenders include it
A lender approved one borrower, with that person’s credit and income, and the clause stops the loan being handed to a stranger the lender never checked. It also lets a lender end a loan written at an old, low rate when the property changes hands, then lend the money again at the current rate.
Where it meets seller financing
When your own note contains one
If you sold a property with owner financing and your documents include a due-on-sale clause, you are the lender it protects. Should your buyer sell the property on, you can require the note to be paid off. Without the clause, a new owner might be able to take over the payments on your terms, leaving you with a payer you never chose. An investor buying your note wants the clause in place for the same reason.
When there is a bank loan underneath
Some sellers finance a sale while their own bank mortgage is still on the property. A wraparound mortgage works this way: the buyer pays the seller, and the seller keeps paying the bank. Bank mortgage documents are where this clause comes from, so read the bank’s paperwork before assuming yours is free of one. Where the clause is there, the sale gives the bank the right to call its loan.
Nobody can tell you in advance whether the bank will use that right. If it does, someone has to pay off or refinance the underlying loan, and that risk sits on both the seller and the buyer.
Transfers that are treated differently
Federal law limits when a lender can enforce the clause on a home loan for certain kinds of transfer. The examples you will see cited include a transfer to a spouse or children, a transfer on the death of a co-owner, and a transfer into a living trust where the borrower stays in the home.
Like the other seller financing rules, these exceptions come with conditions, and they leave some properties and some borrowers out. Ask a real estate attorney whether one covers you before you transfer a property that has a loan on it.
How it affects a note’s price
A buyer reading your documents checks for the clause in two places, and it counts in opposite directions. In your own note it is a plus, because it keeps control over who the payer is. In any loan that ranks ahead of yours it is a risk, because that lender could call its loan. A note on a property with an underlying loan can still be sold, though fewer buyers will take it and the price reflects the added risk.
Reading your own documents
Pull out your mortgage or deed of trust and find the section on transfers, using the note basics guide for any term beside it that you do not recognize. Write down whether the clause is there, and whether any other loan is recorded against the property. A buyer will ask both questions early, so include the answers when you send us the note details. If the section is hard to read, or it mentions a loan you did not know about, take the document to a real estate attorney before relying on your own reading of it.
Related questions
Is a due-on-sale clause the same as an acceleration clause?
They are related. An acceleration clause lets the lender call the whole balance due after a stated event, such as default. A due-on-sale clause is an acceleration right triggered by a transfer of the property.
Should a seller-financed note include a due-on-sale clause?
Including one lets the note holder be paid off if the buyer sells the property on, and a later buyer of the note will want to see it. Whether to include one and how to word it is a question for the attorney drafting your documents.
Does selling my note trigger the due-on-sale clause?
No. The clause is about a transfer of the property. Selling the note transfers the right to receive payments, and the payer still owns the same property on the same terms.