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Due On Sale
The due on sale clause is a provision contained in a mortgage contract the gives the lender the right to demand the full repayment of the loan balance from the borrower when the property in question is sold.
This clause is almost always triggered by a lender when a property is sold.
In the past, traditional common law allows the buyer of a house to preserve the existing mortgage if it is not explicitly disallowed by a lender. This led to a lot of home loans with borrowers who are not homeowners as the new owners want to retain the lower rates of the old loans.
If there is no such terms in a lending contract, chaos might ensue as a borrower will be liable for a home loan in which he is not the property’s owner.
The exception is when there is some type of special arrangement that the borrower and lender has agreed upon.
Or when the mortgage is assumable. In which case, the mortgage will be rightfully taken over by the new homeowner.
For example, if a house is sold for $150,000 with an outstanding assumable mortgage of $100,000, the buyer would pay the seller $50,000 and continue to pay the monthly mortgage payments for the balance of $100,000.
However, the new owner might have to pass certain criteria set by the lender.
In some cases, the new borrower might even be able to recast the loan.
If a mortgage is still under a period where repayment penalty fees are active, then the seller might incur penalty charges for early repayment.
However, a lot of home loan have prepayment penalty terms, but would specifically state that there will be no penalties should the full repayment is a result of the property being sold.
So if you have the intention to sell the house you’ve just bought in the short term, do request for such “get out” clauses to protect yourself from incurring these prepayment penalties.