The Due-on-Sale Clause: What It Is and How Real the Risk Is

What the due-on-sale clause is

Almost every home loan includes a section that says the lender may require the full loan balance to be paid if the property, or an interest in it, is sold or transferred without the lender's written consent. That's the due-on-sale clause. Some people call it an acceleration clause.

The key word is *may*. The clause gives the lender a right, not a duty. The loan doesn't become due automatically when a house changes hands. But the lender can use that right, and no one can promise it won't.

Where to find it in your mortgage

Pull out the mortgage (sometimes called the security instrument) you signed at closing, not just your monthly statement. On most standard Florida mortgages, look for a section titled something like "Transfer of the Property or a Beneficial Interest in Borrower." On the common Fannie Mae/Freddie Mac form, it's usually Section 18.

If you can't find your copy, the title company that handled your purchase or the county clerk's official records will have the recorded mortgage.

What federal law says

The Garn–St Germain Depository Institutions Act of 1982 lets lenders enforce due-on-sale clauses nationwide. You can read it at 12 U.S.C. § 1701j-3.

The same law lists transfers where a lender can't use the clause on a home with fewer than five units that you live in. The main exceptions include:

• A transfer when a borrower dies, to a relative.
• A transfer to a spouse or children.
• A transfer from a divorce or legal separation to a spouse.
• A transfer into an inter vivos (living) trust where the borrower stays a beneficiary and keeps living there.
• Creating a junior lien, like a second mortgage, that doesn't transfer occupancy.
• A lease of three years or less with no option to buy.

A sale to an investor is not one of these exceptions. That's why the risk exists in a subject-to sale.

What tends to draw a lender's attention

Lenders don't usually announce how they decide when to call a loan. In practice, loans that keep getting paid on time tend to draw less attention than loans with problems. Things that can raise flags include:

• Missed or late payments.
• A lapse in homeowner's insurance, or a policy that doesn't list the lender correctly.
• Unpaid property taxes.
• Rising interest rates, which make older low-rate loans more valuable for a lender to call.

None of this is a guarantee either way. Plan as if it could happen.

What a good contract says if the loan is called

If you sell subject-to, the contract should answer this question in plain words: what happens if the lender calls the loan due? Look for:

• A written commitment from the buyer to refinance, sell, or pay off the loan within a specific number of days.
• Who pays any costs tied to that.
• What rights you have if the buyer doesn't follow through.
• How quickly the buyer has to tell you if they get a notice from the lender.

Have your own attorney read this part before you sign.

Questions to ask any buyer

• "Have any of your loans ever been called due? What did you do?"
• "Where in the contract does it say what you'll do if the lender calls this loan?"
• "How many days would you have to pay it off or refinance?"
• "How will I find out if the lender sends a notice?"

For a full checklist, see How to check out a payment-takeover buyer.

Common questions

Related guides

• Subject-To vs. Loan Assumption: What's the Difference?
• How to Check Out a Buyer Who Offers to Take Over Your Payments