What Is an Alienation Clause in Real Estate?
Definition & Examples of an Alienation Clause
An alienation clause is language in a mortgage or trust deed that allows the lender to call the loan immediately due and payable in the event the owner sells or transfers title to the property. It prohibits transferring the loan to the new buyer and renders payment of the remaining balance due immediately.
Almost every loan today contains an alienation clause, also known as a due-on-sale clause. It's important to know what these clauses mean for buyers, sellers, and lenders.
What Is an Alienation Clause?
An alienation clause prevents an existing borrower from transferring the loan obligation when they sell the property at some point in the future. When it's included in a loan contract, it means that the remaining loan balance is due in full upon completion of a sale.
A common type of alienation clause found in many trust deeds is as follows, from the U.S. Securities and Exchange Commission:
"In the event the Property or any part thereof or any interest therein is sold, conveyed or alienated by the Trustor, whether voluntarily or involuntarily, except as prohibited by law, all obligation secured by this instrument, irrespective of the maturity dates express therein, at the option of the holder hereof and without demand or notice, shall immediately become due and payable."
It is practically impossible to find any existing mortgages today that do not contain such a clause. While it might not be stated verbatim, the alienation clause prohibits the transfer of real property without paying off the existing mortgage.
- 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 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 buyer cannot transfer their loan, with its older interest rate and terms, to the new buyer. That buyer must apply for their own financing 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. Even assumable mortgages have some limits on who can inherit the loan, however.
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. German Act put an end to this 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 owner
- Transfer of ownership to the owner's spouse or children
- Change of ownership resulting from separation or divorce
- The title is put in a living trust
- When the owner obtains a second mortgage on the home, such as a home equity loan
In the case of ownership transfers described above, the new owners must live in the home in order to qualify to assume the old mortgage.
Certain types of loans are still typically barred from having a due-on-sale clause. These include VA loans, USDA loans, and FHA loans. Buyers who wish to take over these loans must still meet certain qualifications before they can assume the existing mortgage. Despite these exceptions, alienation clauses are by far the norm on most mortgage contracts.
- An alienation clause, or due-on-sale clause, is part of a mortgage contract that prevents the borrower from transferring the loan with the sale of the home.
- It requires that the original borrower make full payment of the remaining loan balance upon completion of the sale.
- Most mortgages have this clause, but those that don't are called "assumable" and allow for transfer.
- Even with an alienation clause, there are some exceptions that allow for a loan to be transferred to the new owner.