Due on Sale Clause

Due on Sale Clause Information

The due-on-sale clause (also called an acceleration clause or alienation clause) gives the lender the right to: demand full payment of the remaining mortgage balance when the property is sold, transferred, or conveyed, refuse to allow the buyer to assume the existing mortgage, and foreclose if the borrower transfers the property without paying off the mortgage. The clause protects lenders from: interest rate risk (if rates have risen since the mortgage was originated, allowing assumption would lock in the lower rate), credit risk (the new owner may not meet the lender's underwriting standards), and collateral risk (changes in ownership may affect the property's maintenance and value). Most conventional mortgages contain due-on-sale clauses.

Florida Legal Definition

Due-on-sale clauses in Florida are enforceable under the federal Garn-St. Germain Depository Institutions Act (12 U.S.C. §1701j-3), which preempts state laws that limit due-on-sale enforcement. The Act provides specific exceptions: transfers by devise, descent, or operation of law on the death of a co-owner, transfers to the borrower's spouse or children, transfers resulting from divorce or legal separation, transfers into a revocable living trust (where the borrower remains the beneficiary), and other exempt transfers. Under the Act, lenders may not exercise the due-on-sale clause for these exempt transfers. For non-exempt transfers, the lender has the discretion to: allow the assumption (typically at a higher interest rate or with assumption fees), refuse the assumption and demand payoff, or negotiate terms for the assumption.

How It's Used in Practice

In practice, attorneys advise on due-on-sale implications in property transfers and estate planning. The attorney evaluates: whether the proposed transfer triggers the due-on-sale clause, whether any Garn-St. Germain exceptions apply, and the consequences of triggering the clause (the lender may demand payoff or negotiate assumption terms). For estate planning, the attorney structures transfers to avoid triggering the clause: transfers into a revocable living trust qualify for the exception, transfers to a spouse qualify, and transfers upon death qualify. For property sales, the attorney advises: most conventional sales trigger the clause and require mortgage payoff, some FHA and VA loans may be assumable (with lender qualification of the buyer), and seller financing may be used to avoid triggering the clause (the seller retains the existing mortgage and provides a wrap-around mortgage to the buyer, though this carries its own risks).

Key Takeaways

• Due-on-sale: full payoff required upon property transfer.
• Garn-St. Germain exceptions: death, spouse, children, divorce, trusts.
• Most conventional mortgages are not assumable.
• Some FHA and VA loans may be assumed with lender approval.
• Transfers to revocable living trusts do not trigger the clause.

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Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC