Quick Answer
A due-on-sale clause is a provision in most mortgage documents that allows the lender, subject to the terms of the loan documents and applicable law, to accelerate the loan and demand full payment if the property is transferred without the lender consent.
What Does "Call the Loan Due" Mean?
When a lender accelerates under a due-on-sale clause, the entire remaining principal balance becomes immediately due and payable. If the borrower cannot pay, the lender can foreclose. This is a serious consequence, not a theoretical risk.
Why Creative Finance Raises Due-on-Sale Concerns
Creative finance structures wraps, subject-to transactions, certain lease-option arrangements, and other transfers of beneficial ownership may trigger due-on-sale clauses. The question is whether the specific transaction constitutes a transfer that triggers the clause under the loan documents and applicable law.
This is not a simple yes-or-no answer. The Garn-St Germain Depository Institutions Act of 1982 provides certain exemptions from due-on-sale enforcement, including transfers by devise or descent, transfers to a spouse or children, and certain trust arrangements. The applicability of these exemptions depends on the specific facts.
Real Concern, Not Internet Absolutes
Online discussions about due-on-sale clauses often take extreme positions: some say lenders never enforce them, others say they always do. The reality is that enforcement varies by lender, loan type, market conditions, and the specific transaction structure. Scott Horne has heard from clients who received acceleration notices after creative finance transactions. Each situation is unique.
Title Insurance Does Not Cover Due-on-Sale Risk
It is important to understand that title insurance policies generally do not cover loss resulting from enforcement of a due-on-sale clause. This is a risk the parties bear, not something a title policy can insure against.
For guidance, consult qualified legal counsel familiar with due-on-sale issues in your jurisdiction.