Definition of Due-on-sale clause:
A due-on-sale clause is a provision in a mortgage contract that requires the mortgage to be repaid in full upon a sale or conveyance of partial or full interest in the property that secures the mortgage. This provision as also sometimes referred to as an acceleration clause. Mortgages with a due-on-sale clause are not assumable. This clause helps protect lenders against below-market interest rates.
Provision in most conventional mortgage agreements that prevents a subsequent buyer of a property from assuming the mortgage at the original interest rate. Under this clause, the full balance on mortgage must be paid when the property is sold and the new owner must negotiate a new loan at new (usually higher) interest rates.
A due-on-sale clause helps protect the lender, or the ultimate mortgage holder, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage. The holders of a below-market-interest-rate mortgage – or a mortgage-backed security, asset-backed security or collateralized debt obligation backed by a below-market-interest-rate mortgage – generally favor early retirement of that mortgage.
Meaning of Due-on-sale clause & Due-on-sale clause Definition