An alienation clause in real estate is a stipulation included in a mortgage contract that requires the borrower to repay the entire mortgage balance with the appropriate amount of interest before the property can be transferred to a new buyer.
Also known as the due on sale clause, the alienation clause prevents the seller from transferring the property without the lender's permission and states the requirements for legally terminating the contractual obligation. The alienation clause is a common feature of most mortgages, so it's essential to read over the terms and understand what is expected of you.
The alienation clause ensures the lender is repaid before the borrower is allowed to sell their property and prevents them from transferring the same mortgage to the new buyer. The buyer will be required to take out a new loan and go through the underwriting process like any other borrower; they can't just pick up where the former owner left off.
The alienation clause protects the lender's interests and ensures they get their money back. The property is being used as collateral to ensure the borrower pays back the loan. So, the alienation clause prevents the borrower from transferring ownership until the lender has been adequately compensated and approves the sale.
- Assumable Mortgages
- Second Mortgages
- Transfer To a Living Trust
- Joint Tenancy
1. Assumable Mortgages
Loans that do not feature an alienation clause are called assumable mortgages. With an assumable mortgage, the new buyer can assume the loan responsibilities and pick up where the former owner left off. Most loans issued before 1970 – when the alienation clause became standard practice – are assumable loans.
2. Second Mortgages
A second mortgage, such as a home equity loan or HELOC, will not feature an alienation clause. It's illegal for the lender to demand a release of liability for a second mortgage. So, lenders are prohibited from enforcing an alienation clause on this type of loan.
3. Transfer To a Living Trust
According to the Garn-St. Germaine Act of 1982, the alienation clause is also not enforceable if the borrower transfers the property into a living trust if they are still the primary resident and the beneficiary of the trust. Technically, they are not transferring the property to a new buyer, so the alienation clause would not apply.
The alienation clause can't be enforced when the property is transferred due to a divorce or separation. However, it must be the result of a legal settlement that results in the former spouse becoming the property owner.
If the borrower passes away and the property is transferred to a spouse, child, or another relative who currently resides in the home or plans on moving into the home, the alienation clause is not enforceable. But it must be indicated in the borrower's will or through the judgment of the probate court.
6. Joint Tenancy
The lender cannot demand repayment through the alienation clause if a joint tenant takes over the loan. This typically occurs when the borrower passes away and their spouse takes over the mortgage. However, it's not enforceable in the case of any joint tenant assuming the loan.
"The Borrower shall not sell the Property, any part of the Property, or any interest in the Property without obtaining the prior written consent of Lender. If the Borrower sells the Property, or any part of the Property, or any interest in the Property without such consent, the Lender may, at its option, declare the entire unpaid balance of this Mortgage Loan to be immediately due and payable."
The alienation clause is often confused with the acceleration clause, a related yet slightly different concept. An acceleration clause allows the lender to request immediate repayment of the loan balance under certain conditions. It's usually only evoked if the borrower does not honor their commitments outlined in the loan terms, such as missing payments.
The lender has a right to "accelerate" repayment if the borrower doesn't pay on time to recoup the loss. Otherwise, the borrower may face foreclosure. So, the acceleration clause will not take effect unless the borrower fails to honor their responsibilities. In contrast, the alienation clause will take effect under any proposed property transfer, regardless of the buyer's conduct (except in the above exceptions).
The alienation clause is a standard feature of most mortgage loans, so don't be intimidated if you see it. It simply means that when you sell your home, the lender will receive payment for the outstanding balance plus interest, and you will collect the difference as profit. But you may want to consult your broker or an attorney if you have additional questions about the specific terms in your contract.