The already-complicated menu of appraisal options is getting more complex.
What is an alienation clause?
In mortgage terms, an alienation clause is a provision in the contract signed with the lender that states that the borrower must pay the mortgage in full before the borrower can transfer the property to another person. An alienation clause goes into effect whether the property transfer is voluntary or involuntary.
Also called a due-on-sale clause, an alienation clause is included in a mortgage agreement to prevent new buyers from assuming the mortgage. In the case of an assumption, the new buyer would pay for the property with the old interest rate. To prevent this, lenders include the alienation clause, requiring homeowners to pay the balance of the mortgage in full. This, in turn, requires the new buyer to have to negotiate new terms at a new interest rate that is in line with current housing market conditions.
A lender does not have to act upon an alienation clause if it chooses not to. The following situations fall under the Garn-St. Germain Depository Institutions Regulation Act of 1982, which prevents the enforcement of an alienation clause:
- A surviving joint-tenant takes title: After one of the homeowners dies and leaves the house to a surviving tenant, the mortgage does not become due upon transfer into the other tenant’s name. Some lenders try to make joint tenants pay either an assumption fee or the entire amount owed, but this is not legal.
- The title is transferred via inheritance: In this case, the relative to whom the property is transferred must occupy the residence. As in other cases, some lenders try to get the heir to pay an assumption fee, which is not necessary.
- The title is transferred to a child or spouse of a divorced co-owner: As in the case of an inheritance, the child or ex-spouse must occupy the home.
- The title is transferred to a living trust: The lender is entitled to receive a copy of the trust agreement in such a case.
- Dealing with an older mortgage: Sometimes with an older mortgage or mortgages held by private parties, there is no alienation clause in the mortgage contract. If this is the case, then lenders cannot force you to pay the mortgage in full when transferring the title of the property. Make sure to check an older mortgage contract before assuming you need to pay off the mortgage.
- Obtaining a second mortgage: When obtaining a second mortgage on the property, the senior mortgage lender cannot enact the alienation clause and require you to pay the mortgage in full. A prime example of a second mortgage is a home equity loan.
Alienation clause example
In cases where the lender chooses to follow through with the alienation clause, the lender must first notify the homeowner of the intent to accelerate the mortgage or speed up the repayment of the full loan amount. Once homeowners are aware of the acceleration of the payment of the loan amount, they have at least 30 days from the date of the notice to pay the full amount of the mortgage. Most of the time, an alienation clause is binding upon the homeowner.
Use our calculator to determine how much home you can afford to buy.