Due-on-Sale Clause

In depth

The due-on-sale clause, also called an alienation clause, gives the lender the option to call the loan if the borrower transfers any interest without consent. The Garn-St. Germain Act preempts state restrictions but exempts certain transfers like inter vivos trusts and family transfers. Misconception: due-on-sale violations are not crimes; they give the lender a contractual right to call the note, which they may or may not exercise. Practically, subject-to and wraparound transactions inherently risk due-on-sale calls, though enforcement is rare in normal interest rate environments. Sellers and buyers using these structures should plan for the possibility, with reserves to refinance or pay off the underlying loan if called. Land trust transfers attempt to mitigate due-on-sale risk but may not always succeed.