What is a "due on sale" clause?

A "due on sale" clause is a provision in a mortgage or deed of trust that stipulates that if the property is sold or transferred, the outstanding loan balance must be paid in full at that time. This clause serves to protect the lender by ensuring that the mortgage remains under their control and that the borrower cannot simply transfer the debt to a new owner without clearing the existing obligation. If a borrower sells a property with a "due on sale" clause in place, they are required to pay off the mortgage, typically using proceeds from the sale.

Understanding the purpose of a "due on sale" clause is crucial for both borrowers and lenders. For borrowers, being aware of this clause is important when considering selling or transferring ownership of the property, as it could significantly impact their financial planning. For lenders, this clause helps maintain the integrity of their loan portfolio, preventing the risk of the loan being assumed by an unqualified buyer who might not be able to meet the payment obligations.

The other options are related to different terms and conditions that don't specifically describe the "due on sale" clause, highlighting that they pertain to inflation adjustments, interest rate changes, or insurance requirements, none of which encapsulate the essence of this particular clause.