What Is an Alienation Clause in a Mortgage Agreement?
- Published on
- 9 min read
-
Richard Haddad Managing EditorClose
Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
If you have a mortgage and you’re considering selling your home — or even transferring ownership to a family member — you may encounter what’s known as an alienation clause. While the phrase “alienation” can conjure up feelings of not being part of a group, it’s actually about a lender saying it’s time to pay the piper or to fulfill a promise.
In this post, we’ll explain the alienation clause, also known as the due-on-sale clause, and how it can impact your residential home sale or transfer.
Find a Top Agent Familiar with Mortgage Clauses
Whether it’s to speed up your home sale or transfer your property to a family member, HomeLight can connect you with a top-performing local real estate agent who understands the ins and outs of the alienation (due-on-sale) clause.
What is an alienation clause in real estate?
An alienation clause, also known as a “due on sale” clause, is a provision in your mortgage that requires you to pay off the loan balance before you can transfer your property to someone else. This clause is a standard part of many mortgage agreements and often plays an important role in the process of selling your home or transferring ownership.
Its main function is to ensure that the mortgage is settled before the property changes hands, protecting both your interests and those of the lender. The clause is typically triggered when a property is sold, but it can apply in other situations, such as if you are hoping to allow a family member to take over or assume a mortgage.
How does an alienation clause work?
If your lender agreement includes an alienation clause, it activates the moment you decide to transfer ownership of your property, whether through selling, gifting, or bequeathing. Essentially, it prohibits the transfer of the property under the current mortgage terms without the lender’s consent. Here’s how it typically unfolds:
1. Notification: You must inform your lender of your intention to sell or transfer the property.
2. Loan repayment: Before the transfer can proceed, the clause requires that the remaining balance of your mortgage be paid in full.
3. Lender’s decision: In some cases, the lender may allow the new buyer to assume the existing mortgage under revised terms, although this depends on the loan type and the credit qualifications of the person assuming the loan. We’ll share more on assumed loans in a moment.
Example: Imagine you’re selling your home. The sale triggers the alienation or due-on-sale clause, meaning you can’t simply hand over the keys to the buyer and let them take over your mortgage payments. Instead, the sale proceeds are first used to pay off your remaining mortgage balance. Only after this debt is cleared can the ownership transfer to the buyer proceed. This ensures the lender’s investment is protected and allows for the clean transfer of property rights.
Different from an acceleration clause
While both an alienation clause and an acceleration clause are related to mortgage agreements, they serve different purposes. An alienation clause requires the full repayment of the loan upon the transfer of property ownership, a normal part of selling a house and generally a positive move initiated by the homeowner.
On the other hand, an acceleration clause allows the lender to demand immediate repayment of the entire loan balance under pressing conditions, which are usually a negative action, such as non-payment, foreclosure, failure to pay property taxes or provide insurance, or filing for bankruptcy.
How does the alienation clause protect lenders?
The alienation clause serves as a safeguard for lenders by ensuring that the loan is repaid in full before the property can change hands. This provision protects the lender’s investment by preventing the mortgage from being assumed by a new owner who has not been evaluated and approved by the lender. It mitigates the risk associated with a new owner’s potential inability to fulfill the loan obligations, thereby securing the lender’s financial interests.
Does my mortgage have an alienation clause?
To determine whether your mortgage contains an alienation clause, the first step is to carefully review your mortgage agreement. This document outlines all the terms and conditions of your loan, including any clauses related to the transfer of property ownership. The alienation clause, if present, is usually found in the sections dealing with loan repayment or property transfer.
If you’re unsure or cannot find your mortgage documents, contacting your lender directly is the next best step. They can confirm the presence of an alienation clause and explain its specific terms. It’s important to understand how this clause works, as it directly impacts your ability to sell or transfer your property.
Some loans won’t have an alienation clause
For holders of government-backed home loans, such as VA, USDA, and FHA loans, the situation may differ. These loans are often assumable, meaning they can be transferred to a new buyer under certain conditions without requiring full repayment of the loan. However, they still contain specific provisions to prevent unauthorized transfers, ensuring the lender’s interests are protected. These provisions may not be labeled as an alienation clause but serve a similar purpose by restricting the transfer of the mortgage to a new owner without the lender’s approval.
History of the alienation clause (due-on-sale clause)
The emergence of the “due on sale” clause, or alienation clause, can be traced back to the 1970s when banks began to include it in mortgage agreements as interest rates soared. This period saw homebuyers preferring to assume existing loans with lower interest rates rather than taking out new, higher-rate loans from banks. The clause became a strategic tool for banks to essentially eliminate their competition by ensuring that low-yielding loans were paid off upon the sale of the property, allowing them to re-lend at current, higher interest rates.
However, this move by the banks was not without contention. Homeowners challenged the enforcement of the “due on sale” clause, labeling it as an “unreasonable restraint on the alienation of property” or an “unfair trade practice.” While many homeowners found success in state courts, such as in the notable case of Wellenkamp v. Bank of America in California, the banks ultimately triumphed at the federal level. The landmark Supreme Court case, Fidelity Federal Savings and Loan Association v. de la Cuesta, sided with the banks in 1982.
Following this decision, Congress passed the Garn-St. Germain Federal Depositary Institutions Act, which firmly established the legality of the “due on sale” clause nationwide, overriding any state laws or court decisions to the contrary. This act codified the banks’ right to enforce these clauses, solidifying their role in mortgage agreements and ensuring lenders could control the transfer of properties under their financed loans.
Are there exceptions to an alienation clause?
While the alienation clause is designed to protect the lender by ensuring the mortgage is paid off before a property is transferred, there are exceptions where the clause may not be enforced, or certain transfers are permitted without triggering the clause. These exceptions often depend on the specific terms of the mortgage agreement and the lender’s policies. Common exceptions include:
- Transfer between family members: Some lenders may allow the property to be transferred to a spouse or direct relative (next of kin) without invoking the alienation clause, especially in cases of inheritance or estate planning.
- Death: If the property is co-owned and one owner dies, the property may transfer to the surviving owner(s) without triggering the clause. This can also apply if the home is bequeathed to a relative.
- Divorce: In the event of a divorce, transferring the property to a former spouse as part of the divorce settlement usually does not activate the alienation clause. This exception allows for the equitable distribution of assets between spouses without the need to fully repay the mortgage at the time of transfer.
- Living trust transfer: Transferring the property into a living trust where the borrower remains a beneficiary often does not trigger the alienation clause. This arrangement is typically used for estate planning purposes, allowing homeowners to manage their assets and potentially avoid probate without violating the terms of their mortgage.
- Loan assumption approval: In some cases, lenders may approve a loan assumption, allowing a new buyer to take over the existing mortgage under certain conditions. This is more common with government-backed loans like VA, USDA, and FHA loans, but it can occasionally occur with conventional loans under certain circumstances and if the lender agrees.
- Second mortgage: If the original borrower takes out a second mortgage, such as a home equity loan, this typically does not trigger the alienation clause.
It’s important to note that the specifics can vary widely from one lender to another and from one loan agreement to another. Homeowners should consult their mortgage documents and speak directly with their lender to understand the potential exceptions to their alienation clause.
Partner with a top agent to guide you
Managing a home sale and move is demanding, but navigating through the alienation clause is nothing to fear if you have the right professionals by your side. A skilled real estate agent can provide you with the guidance, knowledge, and support you need to make informed decisions about your property. Seasoned agents typically also have:
- Expertise in the local market: An experienced agent understands the intricacies of your local real estate market, helping you navigate through selling or buying a home with ease.
- Connections to real estate attorneys: An agent worth their salt will have established relationships with trusted real estate attorneys and other professionals who can help protect your interests.
- Negotiation skills: With strong negotiation skills, a top agent can ensure that the terms of any sale or transfer of property are in your best interest.
- Understanding legal and financial terms: Real estate agents are well-versed in the legal and financial aspects of real estate transactions, including the implications of alienation clauses and mortgage transfers.
- Streamlining the process: From listing your property to closing the deal, a top agent will streamline the process, making it as smooth and stress-free as possible.
HomeLight can connect you with a top agent who will be your guide every step of the way, ensuring your interests are protected, and your real estate goals are achieved.
Header Image Source: (closewithcindy/ Pixabay)
