Welcome to the RealTown Real Estate Network!
Member Login | Join RealTown
The Real Estate Network

RealTown Words

An acceleration clause found in most mortgage loans, requiring the mortgagor to pay off the mortgage debt when the property is sold, resulting in automatic maturity of the note at the lender’s option. This clause effectively eliminates the possibility of the new buyer’s assuming the mortgage unless the mortgagee permits the assumption, in which case the mortgagee might increase the interest rate or charge an assumption fee. Also called an alienation clause, nonassumption clause, call clause, or a right-to-sell clause, it can be found in contracts for deed and deeds of trust.

Although such clauses are upheld in a majority of states, some state courts and legislatures have invalidated them on the grounds of unreasonable restraint against alienation, at least without a showing that the transfer will impair the lender’s security in the property (the “bankrupt-arsonist buyer”).

The Federal Home Loan Bank Board (FHLBB) issued regulations in 1976 that specifically authorize the insertion of a due-on-sale clause in a residential mortgage given by a federal savings and loan association. In several cases, the courts have held that these federal rules “preempt” the state rules. For example, a state law banning due-on-sale clauses would be effective against state-chartered savings and loans but not federally chartered associations. However, in Nalore v. San Diego Savings and Loan (Ninth Circuit, September 1981), a federal appellate court held that state law controls enforcement of the due-on-sale clause. The U.S. Supreme Court later decided this issue in favor of the federal lenders. In 1982, Congress passed the Garn Act making all due-on-sale clauses in mortgage loans made by deposit institutions enforceable.

The FHLBB regulations do list certain situations where the due-on-sale clause will not be enforced, such as upon transfer after the death of a joint tenant; upon transfer of a leasehold interest of three years or less, provided there is no option to purchase; and upon transfer to immediate family (as in a divorce case).
Related to the due-on-sale clause is a due-on-encumbrance clause, found in a mortgage or a deed of trust, which allows the holder of a mortgage to accelerate the mortgage note if the mortgagor places junior financing on the property. The justification for the clause is that the mortgagee feels that any additional financing reduces the mortgagor’s equity in the property and increases the likelihood of default. Some courts have also invalidated such clauses on grounds that they constitute unreasonable restraints on the free marketability of property.
VA and FHA mortgages issued prior to 1990 do not contain due-on-sale clauses.
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.