Which mortgage clause prevents a buyer from assuming an existing mortgage loan?

The term "clause" identifies a particular section of a contract. Real estate contracts use many types of clauses that you could see on your real estate exam. So let me go into a little bit of depth about different types of clauses.

Let's start with an Acceleration clause

An acceleration clause in a mortgage or trust deed stipulates that the entire debt is due immediately, if the borrower defaults under the terms of the contract. It will also give the conditions for when a lender can demand a full loan repayment. For example, home loans typically have an acceleration clause that is triggered when the borrower misses too many payments.

Accelerating a loan is usually a bad thing. Usually it means that a borrower has missed payments or violated the terms of the contract and the lender is demanding immediate payment of the full loan amount to avoid foreclosure.

While acceleration clauses are mostly used in commercial and residential real estate, they do appear in some leases too. 

The next clause I want to discuss is the Due-On-Sale clause

A due-on-sale clause, also known as an alienation clause, is a loan stipulation that requires a borrower to pay the entire loan balance if the property is being sold. Lenders use due-on-sale clauses to prevent the buyer of a property from assuming the current loan at the original interest rate.

They are often used in a rising interest rate environment. If a bank feels it can make more money on a loan by requiring the buyer of the property to obtain a new loan with a higher interest rate, it will sometimes enforce the due-on-sale clause. For this reason, most loan with a due-on-sale clause are not assumable.

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In short, this is common clause and is found in most conventional home loan paperwork and means that, when a property is sold, the entire balance of the loan comes due. Yup, you have to pay off the whole thing! 

Next we have the Prepayment Penalty clause

Prepayment penalties exist to protect lenders against the loss of interest income that would have been paid on the loan over time. A prepayment penalty clause stipulates a penalty charge which can be imposed on a borrower who pays off a loan early. The fee goes towards compensating the lender for interest and other charges that  would otherwise be lost due to early payment. The prepayment penalty is based on a percentage of the loan balance.

Subordination clause

In real estate, subordination refers to the order of liens on a property. Usually, liens have chronological priority- the first lien to be recorded is first to get paid, etc. To adjust the priority of a lien, a lender may require a subordination clause. A subordination clause effectively makes the current claim senior to any existing claims that have already been recorded.  

Subordination clauses are typically used when a home loan is refinanced and there are existing liens on a property. Refinancing generally results in the original home loan being paid off and a new loan getting issued with the new interest rate. Chronologically, that would put the new loan at the end of the line- but mortgage lenders require their loans to be first in line. In order to complete the refinance, other lien-holders would have to agree to be subordinate to the refinancing loan.

Unfortunately, not all lien-holders may agree to the subordination clause. For example, if you fall behind on your taxes, the IRS may put a lien on your home to ensure they get paid back. If you try to refinance, the IRS will have to decide whether or not to be subordinate to your loan. They may agree but, if they don't, your refinance may not be approved.

Finally, we have the Release clause

A release clause is a loan provision that allows an individual property in a blanket mortgage to be released from any liens by the lender. Blanket mortgages enable investors, builders, and developers to place multiple properties under a single loan, which is much more efficient than having multiple mortgages.

If the loan contains a release clause, a designated parcel or property is freed from any claims by the creditor once a proportional amount of the loan has been paid off, giving the borrower full rights to that property.

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Alienation Clauses Can Be Complex

Found within the fine print of nearly every mortgage, an alienation clause provides a lender with the right to call a loan due instantly if the property owner sells or transfers a property’s title.

Still, what is an alienation clause? An alienation clause is a contingency that prevents you from passing your mortgage on to the next buyer. Your buyer must instead come up with separate financing before closing on your home.

Suppose you’re selling a home that’s under financing with an alienation clause real estate attached. It’s important to understand your financial obligation to your lender once someone makes an offer on your home.

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What is an alienation clause for your specific property? Reading the exact wording of your mortgage’s alienation clause is essential because it details how to be released from your contractual obligation with your lender when you sell your home. This clause is commonly found in both commercial and residential property types.

Take a look at the basics of alienation clauses for most mortgages.

The Purpose of an Alienation Clause in Real Estate

What is an alienation clause’s purpose? An alienation clause in real estate aims to prevent a property owner from transferring a mortgage to a new person. It is a provision that’s in place for the entire life of a home loan.

Yes, you can sell your home before you pay off your mortgage. However, your alienation clause real estate creates an obligation for you to use proceeds from the sale to pay down your mortgage.

The terms of your loan have no bearing on your buyer’s ability to finance a loan with similar terms. If a buyer is not paying with cash, the buyer must work with a lender to come up with financing with interest rates and terms that are applicable for their own financial and credit standings.

What Your Alienation Clause Means If You’re Selling Your Home

If you’re selling a home with a mortgage, your alienation clause means your lender expects you to pay your full remaining balance back at the time of sale. Therefore this clause is often referred to as a due-on-sale clause. Here’s what you’ll typically owe at the time of sale:

• The entire balance of the loan.
  
• All interest that has been accrued since the invocation of the clause.
  
• You will not have to pay “future” interest that would have accrued if the loan continued.

Of course, you must also defer to the language found in your own mortgage contract regarding when and how you are required to handle repayment of your mortgage balance. Homeowners living in financed homes aren’t allowed to simply carry their mortgages with them when they move because mortgages are tied to both individuals and properties.

During the mortgage application process, lenders look at borrowers’ financial situations and credit scores to assess risk. However, they also assess the risk associated with a property using things like your appraisal and home inspection. As a result, the mortgage process must be reset with each move to account for so many changing variables.

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Are there exceptions to alienation clauses?

Lenders technically don’t have to enforce alienation clauses. There are actually several instances where they waive the clause. The T Garn-St. Germain Depository Institutions Regulation Act of 1982 specifically prohibits lenders from invoking this clause under certain circumstances. Here are the exempted situations:

• A home’s title is taken over by a surviving joint tenant after the mortgage holder’s death.
  
• When a title is transferred as part of an inheritance, the exemption applies if the beneficiary moves into the home.
  
• When a title is transferred to a child or spouse of an owner following divorce, the exemption applies if the former spouse or child will occupy the home.
  
• A title is transferred to a living trust.
  
• A home equity loan or mortgage is taken out on a property.

In some cases, very old mortgages may not have alienation clauses. This typically means any loan going back to the 1970s that is still active. Lenders cannot legally try to add in or execute this clause simply because norms have changed since the mortgage was first issued.

What’s the difference between alienation and acceleration clauses?

While an alienation clause is activated when you sell your home, an acceleration clause becomes effective when you fail to meet a requirement of your loan terms. The most common reason is a missed mortgage payment. Both clauses require you to pay back the full balance owed on your loan with accrued interest at once.

What’s the purpose of an acceleration clause?

An acceleration clause is a risk-mitigating tool that gives the lender the right to collect payment in full if you break a condition of your loan. In some cases, a single missed payment could trigger an acceleration clause. While every lender has different rules, here’s a look at the common acceleration clause triggers:

• You conduct an authorized property transfer.
  
• Your homeowners insurance lapses.
  
• You miss mortgage payments.
  
• You haven’t paid your property taxes.
  
• You enter bankruptcy.

If you are unable to pay the remaining balance of your mortgage once your acceleration clause is triggered, the bank is very likely to move forward with foreclosure. You do have the option to try to negotiate with your lender to avoid foreclosure if you’re able to catch up with missing payments.

What’s the opposite of alienation in real estate?

An assumable mortgage is the opposite of an alienation clause. Here’s how it works:

• The buyer takes over the seller’s existing mortgage with all of the terms intact.
  
• The buyer begins making monthly payments on the mortgage.
  
• The seller is released from any obligation or liability regarding the loan.

The big benefit for a buyer who isn’t in a position to get prime loan terms is that they step right into a mortgage with an interest rate based on the previous owner’s credit history instead of their own. 

While some FHA, VA, and USDA mortgages are assumable, this is essentially unheard of for conventional mortgages. Even mortgages that are assumable are still subject to lender qualifications before a mortgage transfer can be approved. Typically, a qualified assumption requires the new buyer to qualify for credit based on debt-to-income ratio and specific underwriting guidelines.

Ultimately, you can’t know if your assumable mortgage can truly be transferred until the bank takes a look at your potential buyer’s credit.

How To Navigate Your Alienation Clause

If you’re putting your home on the market, you may be curious to know if alienation clauses and assumable mortgages are topics you need to discuss with interested buyers. This is a great question to get into once you connect with a top 5% agent from UpNest.

Designed to give you in-person support with competitive commission fees that will save you thousands, UpNest makes it easy to work with a Realtor who will handle open houses, showings, and negotiations for you.

People sell homes with alienation clauses every single day. If your mortgage has this clause, you’ll simply pay what’s due to your lender before moving on without any lingering obligation to your previous mortgage. Learn more today!

What does an alienation clause in a loan do?

An alienation clause in a loan will typically require the person being lended the money to pay back the entirety of the loan if they sell or transfer the property. They will be required to do this using the proceeds of the sale or transfer, thus ending the loan agreement. Alienation clauses are very common on home mortgage loans.

What document would contain an alienation clause?

In real estate, the alienation clause is typically included in the mortgage or trust deed written by the lender and signed by the person receiving the loan. The alienation clause will allow the lender to call the loan due if the homeowner sells or transfer the property. Homeowners should be able to find the exact language of their alienation clause in their original mortgage documents.

What is the alienation clause?

What is the acceleration clause in a mortgage?

Which of the following clauses result in a loan that is not assumable?

What is a due on demand clause?