The due-on-sale clause.

What the clause says

A due-on-sale clause is a provision in a mortgage or deed of trust that lets the lender demand the full loan balance if the borrower transfers the property without the lender's consent. Demanding the full balance at once is called accelerating the loan.

In the standard Fannie Mae and Freddie Mac deed of trust used on most residential loans, the provision is titled along the lines of "Transfer of the Property or a Beneficial Interest in Borrower." The operative words are that the lender may require immediate payment in full. A Texas real estate attorney's summary puts it plainly: the standard instrument merely gives the lender the option to accelerate the note. It does not make the transfer void and it does not trigger anything automatically.

What it does not say

• It does not say the property cannot be sold. It can. The deed is valid and will record.
• It does not say the loan is called. It says the lender may call it.
• It does not set a deadline for the lender to act. The option sits there for as long as the loan is outstanding and the transfer is unapproved.
• It does not release the seller. The borrower on the note stays the borrower.

Commercial deeds of trust are a different animal. The same attorney notes that commercial instruments are more likely to prohibit a transfer outright rather than just allow acceleration. Read the actual document, every time.

The federal law behind it

Due-on-sale clauses are enforceable because of a 1982 federal statute, the Garn-St Germain Depository Institutions Act. Before it, some states limited lenders' ability to enforce the clause; the Act made the clauses enforceable nationally and listed specific transfers a lender may not use as a reason to accelerate on a residential property with fewer than five units.

Those exceptions cover things like a transfer to a relative on the borrower's death, a transfer to a spouse or child, a transfer resulting from a divorce decree, and a transfer into a living trust where the borrower stays the beneficiary and keeps the right to occupy. They are about family and estate situations. As the Texas attorneys reviewing this area point out, the exceptions do not cover an arm's-length sale to an unrelated buyer, which is what a subject-to or wrap purchase is. Investors sometimes hear that a trust makes the clause go away; the exception is about the borrower's own trust, with the borrower as beneficiary, not a transfer of the house to a buyer.

What lenders tend to do

This is where the honest answer has two halves. The lender has the option. Nobody can tell you it will never use it, and any site or seminar that says the bank "can't call the loan" is wrong on the words of the document. At the same time, attorneys who work in this space describe lenders as generally not accelerating loans that are performing, meaning paid on time, with insurance and taxes in order. Interest rates and the lender's own appetite can change that calculus, which is one more reason to say the risk out loud rather than hope.

The practical reading: keep the loan perfect, keep the lender's interest insured, and make sure the seller signed off on the risk with full knowledge, in writing, with an attorney in the room.

How a careful file handles it

1. Pull the recorded deed of trust. Not a summary, the document. Your attorney reads the transfer paragraph in that instrument.
2. Disclose the risk to the seller. In the documents your attorney drafts, so the seller's acknowledgment is part of the file.
3. Put the payments on rails. A third-party servicer collects from the buyer and pays the lender, so there is a record that the loan is current every month.
4. Insure the lender's interest. The buyer's new policy names the lender as mortgagee so the lender's exposure is covered without interruption.
5. Keep the authorization on file. The seller's authorization lets the lender share loan information with the buyer or servicer so nothing is discovered late.
6. Plan the exit. Many buyers intend to refinance or sell within a set period. The file notes it so the loan does not sit unapproved longer than the plan calls for.

None of these steps remove the lender's option. They make the deal the kind of loan a lender has the least reason to look at, and they make sure everyone signed knowing the facts.

Who owns this question

Your attorney decides whether the risk is acceptable on a given deal and drafts the language that discloses it. The title company insures title, not the lender's decision. The seller carries the loan and the exposure. The coordinator's job is narrower: make sure the deed of trust is in the file, the disclosure is signed, the servicer and insurance are set up, and every date is met. Dean Creative Closings does not advise on whether a lender will accelerate and does not promise that it will not.