A common type of alienation clause found in many trust deeds is as follows, from the U.S. Securities and Exchange Commission:
Alternate name: Due-on-sale clause
How the Alienation Clause Works
If a mortgage contract has an alienation clause, as most do, the full loan balance is due as soon as the borrower completes a sale of the property or a transfer of the title. Essentially, what this means is that the proceeds from the sale will first be used to pay off the loan before any money goes directly to the seller. It also means that the seller cannot transfer their loan, with its older interest rate and terms, to the new buyer. The buyer must apply for their own loan under today’s terms. If your mortgage contract does not have an alienation clause, it’s known as an “assumable mortgage,” which means it can be transferred to a new buyer.
Alienation Clause Exceptions
Back in the 1970s, several court decisions ruled that alienation clauses were not enforceable. This was particularly true in California, and it led to all sorts of creative financing efforts from lenders. However, the 1982 Garn-St. Germain Depository Institutions Act put an end to that and has left alienation clauses mostly enforceable. There are still a few exceptions, however, including:
Transfer to a joint owner or relative upon the death of the ownerTransfer of ownership to the owner’s spouse or childrenChange of ownership resulting from separation or divorcePutting the title in a living trustWhen the owner obtains a second mortgage on the home, such as a home equity loan
Certain types of loans are still typically barred from having a due-on-sale clause. These include Veterans Affairs (VA) loans, U.S. Department of Agriculture (USDA) loans, and Federal Housing Administration (FHA) loans. Buyers who wish to take over these loans must be approved by the lender, who will take into consideration the same factors as they would for a new mortgage: your credit score; your credit history that is documented in your credit report; your income, including your debt-to-income ratio; and your existing assets, including cash in bank and retirement accounts. If the seller has a lot of equity in the home—if they have paid off a lot of the mortgage—the buyer must either have a lot of cash to pay for that part of the purchase price or be able to take out a second loan to cover that amount.
