What is an alienation Clause? Your bank includes this in your loan contract, and it stipulates you must pay the mortgage balance and accrued interest when you can sell your property. It is also called a due-on-sale clause.
- A mortgage company may call your loan because of an alienation or acceleration clause.
- Alienation clauses are different from Acceleration clauses.
- You can think of an assumable mortgage as the opposite of an alienation clause.
Continue reading to learn what a due-on-sale clause is and why it benefits the lender. Also, explore how it is different than the acceleration clause the opposite of an assumable mortgage.
Can a mortgage company call your loan?
A mortgage company can call your loan according to the alienation, or due-on-sale clause, they put into your loan contract. The bank may also call a loan according to an acceleration clause. The alienation clause protects the lender when a borrower sells a property, while an acceleration clause protects the bank when a borrower goes into foreclosure.
How Does an Alienation Clause Work?
Banks do this to protect their investment, and there are several reasons why they will call your loan when you sell your house:
- Interest rates and loan terms change, and they may different now than when you bought your home.
- The buyer probably has a different financial situation than you.
Therefore, they include the clause. When you sell your house the proceeds first go to pay off your mortgage, and any money left then goes to you.
Exceptions to the Alienation Clause
There are limits to an e-on-sale clause. The law created certain exceptions. These include:1
- Transfer to a joint owner or relative upon the death of the owner.
- Transfer to a spouse or child upon death.
- Change of ownership because of divorce.
- Title put in a living trust.
- Owner gets a second mortgage or home equity loan.
What triggers an alienation clause?
What triggers an alienation clause is the sale of a home. The purpose of the clause is to make sure that the seller does not transfer the loan to the buyer.
How does an alienation clause benefit a lender?
The alienation clause benefits the lender in two important ways. It ensures that:
- The seller cannot transfer the mortgage to someone who would not be able to get a loan.
- The bank gets aid the full balance of the loan principal and interest at the time of closing.
Therefore, it protects the bank from risk, and it guarantees payment from the borrower.
Difference Between Alienation Clause and Acceleration Clause
It may be easy to confuse a due-on-sale clause with an acceleration clause because they both allow your lender to demand payment in full on your mortgage. However, they serve two different purposes.
- The alienation clause allows the bank to receive payment first due to a sale.
- The acceleration clause allows the bank to begin the foreclosure process if the borrower fails to make timely payments on the loan.
In most cases an acceleration clause kicks in when the borrower misses two payments. Other triggers for the acceleration clause include cancellation of homeowner’s insurance, failure to pay property taxes, bankruptcy, or unauthorized property transfer.2
What is the Opposite of an Alienations Clause?
The opposite of an alienation clause is an assumable mortgage. An assumable mortgage allows the buyer to take over the seller’s existing mortgage with all the terms intact. The buyer takes over monthly payments for the loan, and the seller is released from any obligations related to the mortgage.
Some FHA, VA, and USDA loans are assumable, but almost all conventional mortgage contracts contain alienations clauses that prevent this. An assumption will novate almost all conventional loan contracts. Assumable mortgages are very rare these days, because it greatly increases the risk for lenders.
Final Thoughts on What is an Alienation Clause
Alienation clauses were not common until the 1970s when interest rates went very high. Buyers wanted the sellers to transfer their mortgages to them to save on interest rates. These assumable mortgages put the banks at greater risk, though, and they began putting in alienation clauses to protect themselves from borrowers who are unable to get a loan.
Today, these clauses are very common. Almost all conventional loans contain them, and assumable mortgages are extremely rare. Mortgage contracts also contain acceleration clauses, which begin the foreclosure process.