Due on Sale Clause

What It Means

A due on sale clause is a provision in a mortgage or deed of trust that gives the lender the right to demand immediate repayment of the outstanding loan balance if the borrower transfers ownership of the property — or any interest in it — without the lender's prior written consent. Most conventional residential mortgages contain a due on sale clause.

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The clause is designed to protect the lender's interest in the creditworthiness of the borrower. If ownership changes hands, the lender loses the ability to evaluate and approve the new owner's financial qualifications — which is why the clause exists.

What Triggers It

In co-ownership, several common actions can trigger a due on sale clause review: transferring a co-owner's interest to a new party, adding or removing a co-owner from the Deed, transferring the property into an LLC or other legal entity, or executing a Buyout that changes the ownership structure recorded on the deed.

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Federal law (the Garn-St. Germain Act of 1982) provides certain exemptions — most notably for transfers to a spouse, transfers into a living trust, and transfers resulting from death or divorce. However, transfers between unrelated co-owners generally do not fall under these exemptions and may expose the group to lender action.

Why It Matters for Co-owners

The due on sale clause creates a practical constraint on ownership changes after closing. A co-owner who wants to exit and transfer their share to a replacement co-owner cannot simply execute a new deed — doing so without lender consent risks triggering the clause and the lender calling the full loan balance due immediately.

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This is one reason why Refinancing is often the required path when a co-owner exits. A new loan with the remaining co-owners (or new co-owners) replaces the original mortgage, satisfying the lender's requirements and clearing the due on sale risk.

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The Co-ownership Agreement should address how ownership transitions are handled in light of the due on sale clause, including who bears refinancing costs and what happens if refinancing is not obtainable.

Key Points

• Allows the lender to demand full loan repayment upon unauthorized transfer of ownership
• Present in most conventional residential mortgages
• Triggered by ownership changes including adding, removing, or replacing a co-owner
• Federal exemptions exist for transfers to spouses, living trusts, and certain death or divorce scenarios
• Transfers between unrelated co-owners generally do not qualify for exemption
• Co-ownership Agreements should define transition procedures that account for due on sale clause constraints