An alienation clause in real estate requires the immediate repayment of the remaining mortgage balance following the sale or transfer of a property. While an alienation clause can be found in most existing mortgage contracts today, it still presents some challenges to the owner when selling.
Learn what an alienation clause is and how it may impact your rights to sell. We’ll also review other standard provisions found in real estate contracts, including consent and right of first refusal clauses.
What is an Alienation Clause?
An alienation clause, sometimes referred to as a due-on-sale requirement, is a contract stipulation that allows the lender to request immediate and full payment after the sale of a property. Most mortgage lenders have alienation clauses in place, which require the borrower to repay the existing mortgage in full at the time of the sale instead of making mortgage payments.
The property’s title will not be transferred to the new owner until the original lender receives immediate full repayment, including incurred interest payments. The initial loan holder will also not receive sale proceeds until the original loan has been repaid. An alienation clause is common with conventional mortgages but less so with FHA loans.
Types of Alienation Clauses
An alienation clause requires repayment of mortgage debt before property transfer. However, there are a few different alienation clause types to know about, including the following:
- Due-on-sale clause
- Consent clause
- Right of first refusal clause
It’s crucial to understand the type of alienation clause you have so you can understand the terms and conditions associated with it.
Most people mistakenly associate acceleration clauses with alienation clauses. However, they are not the same thing. An alienation clause is often the result of selling the property.
An acceleration clause means the full loan is due because the borrower didn’t meet the loan terms, such as missing a payment. An acceleration clause may be triggered if the borrower sells the property without the lender’s approval.
Due-on-Sale Clause
A due-on-sale clause is an alienation clause that protects the lender’s interests by requiring loan repayment in full following the sale or transfer of a property. Under this clause, the full outstanding balance plus accrued interest must be paid before the company transfers the title.
Mortgage lenders first began putting due-on-sale clauses in mortgage contracts in the 1970s, but state laws impacted mortgage lending requirements. By 1982, Congress legalized the Garn-St. Germain Federal Depository Institutions Act, which provided protections to mortgage lenders.
Today, most conventional loans have an alienation clause. However, Federal Housing Administration (FHA) and United States Department of Veterans Affairs (VA) loans will likely have an assumable mortgage rather than an alienation clause.
Triggering Events
The sale of a property automatically triggers the activation of the due-on-sale clause. However, the due-on-sale clause may be active in the following property transfers:
- The property is sold
- The property is gifted to someone other than the original borrower
- The current owner transfers the property to another owner
The initial real estate borrower must notify the lender of these triggering events. Failing to do so within the contract’s time limits could lead to expensive consequences and penalties. Most mortgage contracts outline specific time limits.
Consequences of Violation
Violating the due-on-sale clause can lead to loan acceleration and foreclosure. The loan agreement should list the consequences of violating this clause. Acceleration clauses require the borrower to repay the full loan balance, and the lender may foreclose on the property if the owner cannot pay.
Exceptions
Some exceptions may prevent the alienation clause, such as following a divorce settlement, a living trust transfer, or a next-of-kin transfer. An alienation clause also doesn’t apply if the owner dies. The surviving joint tenant can also assume the mortgage without the consequences of the alienation clause.
Alienation clauses don’t apply to a second mortgage, either. Borrowers can still take a second home loan, such as a home equity loan, without consequences.
An assumable mortgage contract is also not subject to a due-on-sale clause. Assumable mortgages allow the current homeowner to transfer the property and the mortgage to the new buyer. However, after Congress passed the law in 1982, most conventional mortgages have an alienation clause.
Consent Clause
A consent clause gives the mortgage lender control over transferring the property. Consent clauses are most commonly used in rental properties but can also be present in a standard mortgage agreement. They require an existing tenant or owner to receive lender approval before subleasing or transferring the property ownership.
Obtaining Consent
Contracts with a consent clause require the current tenant to request approval from the property owner or lender to sell or transfer the property. Consent should be in writing.
Reasons for Denial
Consent approval depends on many factors, including the new borrower’s personal finance history and intended use of the property. Property transfers may be denied if the new owner doesn’t meet credit requirements, owes back property taxes, or intends to use the property for a purpose other than what the mortgage company permits.
Right of First Refusal Clause
A right of first refusal clause gives a third party the first option to purchase before the property is sold to exterior parties. In most cases, the clause is reserved for a family member of the current property owner, usually a surviving spouse or child. However, the contract may also include other eligible family members.
How it Works
A right of first refusal clause requires the current property owner to allow the designated third party to make an offer before selling to anyone else. The owner can only sell the property to someone else if the initial person declines their right to purchase. The property transfer may also be subject to lender requirements.
Common Uses
Right of first refusal clauses are commonly used in shared living developments, such as condominiums or planned communities. They may also be used in real estate transactions involving legal separation or in the ownership of commercial properties with multiple tenant or investor interests.
Implications for Sellers
Sellers should review all contracts in detail before selling. Mortgage lenders commonly include contract clauses that can dictate the terms of the sale. Understanding these implications is important for the seller to avoid expensive penalties.
Here are a few key seller implications for mortgage loan clauses to know about.
Understanding Restrictions
Sellers should review their mortgage documents before selling to understand the rules and requirements of these clauses. An alienation clause may come with restrictions that can impact the selling process. An acceleration clause may require the current owner to repay the loan in full, which could lead to foreclosure with non-payment.
Potential Challenges
Alienation clauses can present sellers with challenges. For example, they may delay the closing process. Mortgage contracts with alienation clauses also restrict buyers, further slowing down the selling process for everyone involved.
The unique requirements of an alienation clause can make it difficult for sellers to sell their property following certain circumstances. The slower transfer and processing time can also be difficult for sellers who need or want to sell quickly. An alienation clause also means special requirements, which may only be convenient for some sellers.
Seeking Legal Advice
It is advisable to review your loan agreement in detail before selling a property. You may also seek legal advice to better understand an existing mortgage’s repayment and transfer requirements to avoid expensive consequences. Additionally, any individual state law rules could further impact your selling rights.
Working With a Cash Home Buyer Makes Everything Simpler!
Selling to a cash buyer offers many advantages over a traditional sale, such as avoiding selling challenges like alienation clauses.
An alienation clause prevents the transfer of a property without repayment of the remaining balance and, in some cases, loan approval. The new borrower may be subject to credit and income requirements. With a cash buyer, sellers can skip these requirements and move on without the inconvenience.
A-List Properties makes it easy for sellers to obtain a cash offer, thus speeding up the selling process. Skip the real estate agents and alienation clause stipulations and turn your monthly payments to the lender into saved cash.
Contact A-List Properties today at (972) 526-7042 to discuss your cash options. Interested sellers can also fill out our online form to receive a fast cash offer.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.