Definitions

due

Due-on-sale clause

A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

Virtually all recent mortgages made in the United States contain a due-on-sale clause. This is in contrast to the wide availablility of assumable mortgages that were available in the past.

In real estate investing, the due-on-sale clause can be a concern for a property owner who wishes to extend seller financing to a potential buyer by using a wraparound mortgage. This arrangement triggers the due-on-sale clause of the seller's underlying mortgage and thus the lender may call the loan. In this case, if the seller doesn't have enough cash on hand to pay the full balance of the note, the bank could foreclose on the property. There is debate in the investing community as to how likely a bank is to actually call the loan due in such a situation.

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