What does a due on sale clause in a mortgage typically do?

What does a due on sale clause in a mortgage typically do?

• A. Makes a mortgage non-assumable
• B. Allows the mortgage to be transferred without restrictions
• C. Reduces interest rates if the property changes hands
• D. Extends mortgage time if sold

Answer: (A)

A due on sale clause in a mortgage primarily serves to make the mortgage non-assumable. This means that if the property is sold, the lender has the right to demand full repayment of the remaining loan balance rather than allowing the buyer to take over the mortgage with its existing terms. The intention behind this clause is to protect the lender’s interests, ensuring that the loan is not transferred to someone whom the lender has not approved. Without this clause, borrowers might sell their properties and leave the loans in place, potentially with buyers who pose a higher risk to the lender than the original borrower. In scenarios where the property is sold, the due on sale clause gives the lender control over who is taking on the debt and allows them to reconsider the terms of risk associated with the new property owner. This is particularly important in cases where the loan conditions, such as interest rates, might not be favorable for the lender if transferred without reassessment.

A due on sale clause in a mortgage primarily serves to make the mortgage non-assumable. This means that if the property is sold, the lender has the right to demand full repayment of the remaining loan balance rather than allowing the buyer to take over the mortgage with its existing terms.

The intention behind this clause is to protect the lender’s interests, ensuring that the loan is not transferred to someone whom the lender has not approved. Without this clause, borrowers might sell their properties and leave the loans in place, potentially with buyers who pose a higher risk to the lender than the original borrower.

In scenarios where the property is sold, the due on sale clause gives the lender control over who is taking on the debt and allows them to reconsider the terms of risk associated with the new property owner. This is particularly important in cases where the loan conditions, such as interest rates, might not be favorable for the lender if transferred without reassessment.