What is an alienation clause?
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An alienation clause, or due-on-sale clause, is common in most mortgage contracts. This provision requires a home seller to repay the balance of their mortgage at the time of sale. Here’s what that means for the seller and the homebuyer.
What is an alienation clause?
The alienation clause in a mortgage contract gives a mortgage lender the right to request the full and immediate repayment of the loan, including principal and interest, when the borrower sells or transfers their home. The clause makes it a requirement to repay the balance before the property’s title can be transferred to the buyer. Since the balance becomes due on sale, this provision is also known as the due-on-sale clause. This stipulation applies regardless of whether the sale or transfer is voluntary or involuntary.
Alienation vs. acceleration clause
Both an acceleration clause and an alienation clause make it possible for mortgage lenders to demand full, immediate repayment of the loan all at once, at any time. The difference is that the contract language around the acceleration clause typically centers on instances of non-payment and foreclosure, rather than a sale or transfer. In rare circumstances, other issues can trigger loan acceleration, as well, such as canceling homeowners insurance, failing to pay property taxes or filing for bankruptcy.
How does the alienation clause work?
The alienation clause serves a number of purposes for the lender. To start, it assures the lender that the borrower will repay the funds. This clause also necessitates that the borrower notify the lender before transferring or assigning the mortgage to anyone else. Most importantly, an alienation clause prevents the homebuyer from assuming the mortgage. Without this clause, the buyer could assume the existing mortgage and repay it at that interest rate, rather than obtaining a new loan at prevailing rates.
For the seller, the alienation clause requires repayment of their mortgage balance on the date of closing. Often, the seller will pay the balance off with sale proceeds.
Exceptions to the alienation clause
In most cases, mortgage lenders enforce the alienation clause, but there are exceptions when the borrower can transfer the mortgage to someone else without triggering the clause, and therefore without needing to pay back the mortgage. These are as follows:
- The borrower passes away and the property is transferred to a joint owner or to a relative of the owner
- The property transfers during a divorce or separation
- The property is transferred to a living trust
- The owner obtains a second mortgage on the home, such as a home equity loan
- There is an assumable mortgage on the property, meaning that the mortgage was originated before the 1970s and doesn’t have an alienation clause
If you’re a home seller, the alienation clause in your mortgage contract means you’ll have to pay back the balance of your loan when you sell or transfer your home to someone else. Mortgage lenders rely on this provision to ensure they’ll be repaid in full. Alienation clauses come standard with most mortgages today.