Due-on-sale clause
A loan provision that lets the lender demand immediate payment of the entire remaining balance when the property securing the loan is sold or transferred.
Key Takeaways
- A due-on-sale clause gives the lender the right to demand the entire unpaid balance when the secured property is sold or transferred without consent.
- The clause is permissive, not automatic. The lender may call the loan and is never required to, so a transfer that goes unnoticed is still exposed later.
- A due-on-sale clause is also called an alienation clause, and it is one specific trigger inside the broader family of acceleration clauses.
- Federal law at 12 U.S.C. 1701j-3 lets lenders enforce these clauses over contrary state law but bars enforcement on listed family transfers, such as a transfer to a relative after the borrower's death.
What It Means
A due-on-sale clause is a provision in a loan's security instrument that lets the lender call the entire unpaid balance immediately payable the moment the property is sold or otherwise transferred without the lender's consent. Washington paperwork also calls it an alienation clause. It belongs to the family of acceleration clauses, which collapse a whole debt into one immediate obligation when a stated event occurs. Here the triggering event is the transfer itself, not a missed payment.
The clause protects the lender's underwriting. That loan was priced for one borrower's credit and one interest rate. If a buyer could simply step into it, the lender would be carrying a stranger's credit and, in a rising market, a below-market rate it never agreed to extend. Two points trip students up. First, the clause is an option the lender holds, so nothing happens automatically at closing. Second, the clause lives in the Deed Of Trust or mortgage that secures the debt, while the borrower's promise to repay lives in the Promissory Note.
How It Works in Washington
Washington secures most home loans with deeds of trust. RCW 61.24.030 lists what must be true before a trustee may hold a sale. Subsection (3) requires a default in the obligation secured, or in a covenant of the grantor, which by the terms of the deed of trust makes the power to sell operative. A due-on-sale clause is one of those covenants. Transfer the property without consent, then refuse the lender's payoff demand, and the lender has a default it can act on without filing suit. That is how an unapproved transfer can end in a nonjudicial Foreclosure.
Federal law sets the outer limits. Under 12 U.S.C. 1701j-3, a lender may enforce a due-on-sale clause despite any state law to the contrary, so Washington cannot legislate the clause away. The same statute lists transfers a lender may not call the loan on. They include:
- a transfer to a relative resulting from the borrower's death
- a transfer where a spouse or children become owners
- a transfer to the borrower's spouse under a divorce decree or property settlement
- a lease of three years or less with no option to purchase
- a transfer into a living trust where the borrower stays a beneficiary and occupancy does not change
Example
Ron owns a rental duplex in Everett. His deed of trust carries a $228,000 balance at 3.25 percent, and principal and interest run about $992 a month. He sells to Alice for $395,000, and because that rate is so far below market they agree Alice will take title Subject To the existing loan and keep making Ron's payments rather than pay it off.
Escrow records the deed on March 3. The servicer's routine title sweep catches the transfer six weeks later and mails both of them a letter invoking the due-on-sale clause: the balance, then about $227,400, is payable within 30 days. Nothing on the exempt list in 12 U.S.C. 1701j-3 fits, because Alice is a stranger buying an investment property. Alice refinances the $227,400 at 6.75 percent, which lifts principal and interest to about $1,475 a month, and the bargain rate that made the deal work is gone. Had the servicer never noticed, the clause would still have been sitting there, available to the lender at any time.
Common Mistakes and Exam Traps
- A due-on-sale clause does not make the sale illegal or void the deed. The transfer is still effective; the clause simply gives the lender the right to demand payoff.
- Acceleration is the category and due-on-sale is one trigger inside it. A loan called due for missed payments was accelerated under the general acceleration clause, not the due-on-sale clause.
- Taking title subject to an existing loan does not dodge the clause. That is precisely the transfer the clause was written to catch.
- A lender-approved assumption is the opposite of a due-on-sale problem. The lender has consented to the new borrower, so there is nothing left to accelerate.
Where you'll learn this
Frequently Asked Questions
Can a Washington lender choose not to enforce a due-on-sale clause?
Yes. Federal law at 12 U.S.C. 1701j-3 says a lender may enforce the clause, not that it must, so a lender is free to consent to the transfer or approve a formal assumption instead. Get that consent in writing before closing rather than relying on a quiet servicer.
What is the difference between a due-on-sale clause and an acceleration clause?
An acceleration clause is the general power to call the whole balance due when a stated event occurs, most often a payment default. A due-on-sale clause is one specific trigger inside that family: the sale or transfer of the property. Every due-on-sale clause accelerates the loan, but not every acceleration involves a sale.
Does inheriting a house trigger the due-on-sale clause?
No. 12 U.S.C. 1701j-3 bars a lender from calling the loan on a transfer to a relative resulting from the borrower's death, and on transfers by devise, descent, or operation of law on the death of a joint tenant. The heir still has to keep the payments current to avoid an ordinary default.