Quick Answer
The due-on-sale clause in a Texas mortgage or deed of trust allows the lender to demand immediate full payment if the property is sold or transferred without the lender's consent. This clause is a critical risk factor in creative finance transactions such as subject-to and wraparound mortgages. Not all lenders enforce the clause, but the risk exists in every transaction.
Educational Information
This article provides general educational information about due-on-sale clauses. It does not constitute legal advice. The enforceability of due-on-sale clauses is governed by federal law (Garn-St. Germain Depository Institutions Act of 1982), the specific loan documents, and applicable state law. Consult qualified legal counsel before structuring any transaction that may trigger a due-on-sale clause.
The due-on-sale clause is a standard provision in most Texas mortgages and deeds of trust. Understanding how it works is essential for anyone involved in creative finance transactions.
What Is a Due-on-Sale Clause?
A due-on-sale clause gives the lender the right to declare the entire loan balance immediately due and payable if the property is sold or transferred without the lender's prior consent. This clause is included in virtually all conventional mortgages in Texas. For a thorough discussion, read our article on the due-on-sale clause in creative finance transactions.
Federal Law and the Garn-St. Germain Act
The Garn-St. Germain Depository Institutions Act of 1982 preempts state law restrictions on due-on-sale enforcement. This means lenders generally have the right to enforce due-on-sale clauses in their loan documents, subject to specific exceptions under the Act (such as transfers to a spouse or children, or into certain trusts).
Due-on-Sale in Subject-To and Wrap Transactions
In a subject-to transaction, the buyer takes title while the existing loan remains in the seller's name. In a wrap transaction, the seller provides financing that wraps around the existing loan. In both cases, the transfer of title may trigger the due-on-sale clause. However, many lenders do not automatically enforce the clause, particularly when payments continue to be made on time. The risk, though real, may not materialize in every case. For more, see our Texas-specific guides on subject-to transactions in Texas and wraparound mortgages in Texas.
FAQs
Does every Texas mortgage have a due-on-sale clause?
Most conventional mortgages and FHA/VA loans contain a due-on-sale clause. Check the specific loan documents to determine whether your loan includes this provision.
What happens if the lender enforces the due-on-sale clause?
The lender demands immediate full payment of the loan balance. If the borrower cannot pay, the lender may initiate foreclosure. The parties to the creative finance transaction would need to resolve the accelerated loan.