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Key takeaways
- In a mortgage contract, an alienation clause requires the borrower to repay the full balance of their loan immediately when they sell or transfer the property.
- Also known as due-on-sale clauses, alienation clauses are standard in most mortgage contracts.
- Due to the Garn-St. Germain Act of 1982, lenders can enforce alienation clauses nationwide, with some exceptions.
What is an alienation clause in real estate?
An alienation clause is a standard provision in most mortgage contracts that requires a seller to settle their outstanding mortgage balance before transferring the title to a buyer. It applies whether the sale is voluntary or not, for example, in the case of foreclosure.
In 1982, alienation clauses became enforceable throughout the country in many situations, due to the Garn-St. Germain Act. Before that, some states allowed the enforcement of alienation clauses, and others didn’t.
How does the alienation clause work?
On its face, an alienation clause assures the lender that the borrower will repay their loan, but lenders typically use these clauses to prevent loan assumptions. Without this provision, a buyer could technically take over a seller’s current mortgage, rather than getting their own loan at today’s rates, which could be higher. In this case, a lender could end up in a loan agreement with a borrower it hasn’t vetted.
The alienation clause requires the borrower to give their lender a heads-up before transferring the mortgage to another party.
If you’re selling your home and have an alienation clause in your mortgage, you must settle any outstanding mortgage debt when the transaction is finalized. In many cases, you’ll pay it off with the proceeds from your sale at closing.
Alienation vs. due-on-sale clause
“Alienation clause” and “due-on-sale clause” refer to the same concept and are used interchangeably. Both describe the rule that dictates a remaining mortgage balance comes due when the property is sold or transferred.
Alienation vs. acceleration clause
Alienation clauses and acceleration clauses are similar in one way: They both let lenders demand full and immediate payment before a loan term officially ends.
However, acceleration clauses are generally triggered when a borrower fails to uphold the terms of their mortgage agreement, rather than when a home is sold. A lender might enforce an acceleration clause if a borrower misses multiple mortgage payments, cancels their homeowners insurance, doesn’t pay their property taxes or files for bankruptcy.
| Alienation clause | Acceleration clause | |
|---|---|---|
| Purpose |
For lenders to request full and immediate payment of a mortgage balance |
For lenders to request full and immediate payment of a mortgage balance |
| When it’s triggered |
A property is sold or transferred |
A borrower violates their contract terms |
Exceptions to the alienation clause
Mortgage lenders usually enforce alienation clauses. However, there are certain situations when borrowers can transfer their mortgage without having to repay the loan. These include:
- Death: If someone dies with a mortgage, their home can pass to a joint owner or a relative.
- Divorce: One member of a couple can generally take over a mortgage in the case of a divorce or legal separation.
- Living trust transfer: A borrower can transfer a property into their living trust, especially if they continue to live in the home.
- Direct transfer to next-of-kin: A borrower may transfer a property to a spouse or child during their lifetime.
- Second mortgage: The lender typically can’t enforce the alienation clause if a borrower takes out a second mortgage on their house, such as a home equity loan.
Keep in mind that not all mortgages include alienation clauses. Unlike conventional loans, government-backed loans — like FHA, VA and USDA loans — are typically assumable mortgages. If a mortgage originated before the Garn-St. Germain Act took effect, it would be assumable as well.
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