If the title search uncovers an issue, there can be considerable legal costs.
What is a due-on-sale clause?
A due-on-sale clause is a stipulation in a mortgage or deed of trust, requiring a borrower to pay the entire loan balance upon the sale of the property for which a mortgage is being secured. Banks and mortgage lenders use due-on-sale clauses to prevent the buyer of a property from assuming the current mortgage at the original interest rate. Buyers of a property with a due-on-sale clause in the mortgage must negotiate a new interest rate.
Most due-on-sale clauses require you to obtain prior written consent from your lender before you transfer any interest in your property.
Mortgages with due-on-sale clauses are not assumable. That means the buyer of your property cannot take over your current mortgage. However, if someone inherits your property and plans to live in it, your bank or mortgage lender cannot enforce the due-on-sale clause.
The 1982 Garn St. Germain Act also states that mortgage lenders cannot enforce the requirement if property ownership changes due to a legal separation or divorce.
Lenders use the due-on-sale clause in a rising interest rate environment. If a bank feels it can make more money on a mortgage by requiring the buyer of the property to obtain a new mortgage with a higher interest rate, it will sometimes enforce the due-on-sale clause.
Banks also use the due-on-sale clause if they feel the property that secures the mortgage is at risk. However, lenders rarely exercise the due-on-sale clause since mortgage interest rates are much lower than the period when the government passed the law establishing the provision.
Due-on-sale clause example
If you transfer your property through a quitclaim deed or try to sell your home without prior written consent from your lender, the bank can exercise the due-on-sale clause and foreclose on your property, which leaves you with the burden of paying the loan in full. Banks can exercise the due-on-sale clause and start foreclosure proceedings even if your mortgage payments are current.