If you're trying to sell your house and wondering why you can't just transfer your current mortgage to the new homeowner, it's because of a small clause in your mortgage agreement referred to as the 'due-on-sale' clause.
Read on to find what is it and why is it important for lenders...
A due-on-sale clause is a condition or stipulation in a mortgage contract that states the borrower must pay the entire amount of the loan upon the sale of the property.
In case the borrower fails to pay the complete loan amount, or transfers the loan to the new buyer without the knowledge of the lender, the lender can foreclose the property. It's also sometimes referred to as an acceleration clause.
The due-on-sale clause essentially protects the lender from credit defaults and is typically present in all mortgage contracts made after 1988.
Without such a clause, the original borrower can sell the property to a new buyer subject to an existing loan, meaning the new buyer takes over the mortgage payments, but without a formal agreement with the lender who made the original mortgage.
This places the lender at risk as the buyer now making the payments may not have been vetted or underwritten.
The due-on-sale clause comes into effect when a homeowner decides to sell or transfer their mortgaged property.
The original owner is liable to let the lender know of the upcoming sale. However, invoking a due-on-sale clause is not mandatory.
If the lender anticipates a credit risk from the new buyer, or the mortgage environment is such where the lender can get a higher interest rate by enforcing a payoff and then funding a new loan elsewhere, they are likely to enforce the clause.
Assumable conventional mortgages that aren't backed by the federal government are exempted from the due-on-sale clause.
These include mortgage loans such as VA loans, FHA loans, and USDA loans.
Other exemptions to this clause include transfers to spouse, kids, ex-spouse, and any such beneficiary.
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