Due-on-Sale Clause

A due-on-sale clause is a mortgage provision giving the lender the right to demand full repayment of the loan when the property is sold or title transfers.

A due-on-sale clause is a provision in nearly every modern mortgage that gives the lender the right to demand the entire loan balance if the property is sold or title transfers without the loan being paid off. It exists so borrowers cannot pass a low-rate loan along to a new owner the lender never underwrote. Federal law — the Garn–St. Germain Act — made these clauses broadly enforceable, with a short list of exceptions such as certain transfers to a spouse or into the borrower's own trust.

The clause is the central question in creative finance because subject-to and wraparound deals transfer the deed while the original loan stays in place — exactly the event the clause covers. The key word is right, not obligation. The lender may accelerate the loan, and if it does, the balance comes due, which typically forces a refinance, a resale, or a payoff to avoid foreclosure. Whether a lender ever exercises that right is at the lender's discretion.

Beginners get this wrong in both directions. Some hear "due-on-sale" and conclude subject-to is illegal — it is not; the clause is a contract term that creates lender rights, not a law forbidding the transfer. Others pretend the clause does not exist and buy with no reserves and no exit. Experienced buyers do neither: they take the deal understanding the risk, keep the loan current, and hold a real backup plan — the ability to refinance or sell if the note is ever called. This is not legal advice.