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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 current homeowner, and sometimes for the homebuyer as well.
What is an alienation clause in real estate?
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 settle the outstanding balance before the property’s title can be transferred to the buyer. Since the loan 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.
In the 1970s, there was quite a bit of back-and-forth about the enforceability of alienation clauses. Some states allowed them, some didn’t. As a result, Congress passed the Garn-St. Germain Act (officially the Garn-St. Germain Depository Institutions Act) in 1982, which officially made the clauses enforceable (with a few exceptions, which we’ll cover below). Specifically, Title II of the act preempted state laws that thwarted the due-on-sale or alienation clauses in mortgage contracts.
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, ahead of the stated loan term. The difference between an alienation clause and an acceleration clause is that the contract language around the acceleration clause typically centers on instances of non-payment and foreclosure, rather than a sale or transfer.
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 a homebuyer from assuming the current mortgage on the property. Without this clause, the new owner 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 means they must settle their mortgage debt on the day the transaction goes through. Often, they will pay the balance off with the sale proceeds, handing a check to the lender’s rep at the closing.
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:
- Death: The borrower passes away and the property is transferred to a joint owner or bequeathed to a relative
- Divorce: The property transfers during a divorce or legal separation
- Living trust transfer: The property is transferred to a living trust
- Direct transfer to next-of-kin: The property transfers to a spouse or child during the borrower/owner’s lifetime
- Second mortgage: The owner obtains a second mortgage on the home, such as a home equity loan
- Assumable mortgage: There is an assumable mortgage on the property, meaning that it doesn’t have an alienation clause. This would be the case if the mortgage originated in the 1970s or early 1980s, or it is a certain type of government-backed loan (see below).
Keep in mind: While rare, mortgages with 40- and 50-year terms do exist. They are non-qualified or non-conforming loans, meaning they cannot be sold to major market-makers Freddie Mac or Fannie Mae and don't adhere to standards set by the Consumer Finance Protection Bureau.
How does an assumable mortgage work with an alienation clause?
While alienation clauses prevent homeowners from transferring their mortgage to a buyer before paying back their loan, assumable mortgages are almost the opposite. If a mortgage is assumable, it means that a buyer can come in and take over the current mortgage – with its rate and terms intact.
Alternatively, someone could assume a mortgage by inheriting a property from a deceased person or receiving it in a divorce proceeding. Even in the case of conventional loans, the Garn-St. Germain Act provides protections for relatives who inherit property with outstanding mortgages — by barring the lender from enforcing an alienation clause.
Bottom line on alienation clauses
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.
Additional reporting by Taylor Freitas