Most mortgages will have a due on sale clause. This clause forces a homeowner to pay the remainder of their loan if they sell that property. Most homeowners start the process of selling their home with the intention of paying off their mortgage in full. But the due on sale clause is in place to make sure this happens.
A due on sale clause is an acceleration clause. In most cases, an acceleration clause is a negative thing. If a homeowner has been missing payments or has otherwise broken their contract, the lender can activate the acceleration clause. A homeowner will then get a letter stating the full amount of the loan is due by a certain date.
While acceleration clauses are typically negative, the due on sale clause is more of a formality. When a homeowner decides to sell their home they typically want to use the profits to pay off the remainder of their mortgage. Once this is done they can take out a new mortgage to purchase a different property.
Lenders put acceleration clauses and due on sale clauses in their contracts to make sure homeowners pay back their full mortgage. It prevents the homeowner from trying to transfer the mortgage onto the buyer. This also stops them from trying to take the mortgage with them to their new property.
Mortgage companies do not want loans to be transferred from person to person or even house to house. Each mortgage is structured around one person and one house. If that person wants to move, they need to pay off that mortgage and apply for a new one that matches their new property.
Not all mortgages have a due on sale clause. For example, there are a few types of loans that have not written this clause into their contract including FHA loans, USDA loans, and even VA loans.
Without this clause in the contract, the mortgage can be transferred to a new person. When a mortgage is transferable they are referred to as “assumable loans.” In this instance, a buyer could potentially take over another person’s loan instead of applying for a new mortgage.
In the days of high-interest rates, transferring loans was more common. A buyer would seek out a seller who would transfer their mortgage to them so they could get a much lower interest rate. Currently, interest rates are so low that this process is simply time-consuming and not worth the effort.
Even though there are loans that do not have this clause that does not mean any buyer can take over the mortgage. The buyer must still meet the criteria for the loan before it can be transferred. Some lenders will allow mortgages to be transferred if there has been a major life event like a divorce or even a death.
Transferring a mortgage is not a prevalent as it used to be. Few buyers care to take over another person’s loan. This is why lenders will put in a due on sale clause to make sure buyers and sellers do not take this route. They want to review each buyer and home individually before they provide a mortgage.