Understanding the Due-On-Sale Clause in Texas Real Estate
A due-on-sale clause is an important provision found in most mortgage agreements that allows lenders to demand full repayment of a loan when a borrower sells or transfers ownership of the property without prior consent. This clause ensures that lenders maintain control over their loans and prevents buyers from assuming mortgages with below-market interest rates.
How Does a Due-On-Sale Clause Work?
When a property is sold, the proceeds from the sale typically go toward paying off the seller’s existing mortgage. However, if the seller transfers ownership without repaying the mortgage, the lender can invoke the due-on-sale clause and demand full payment of the remaining balance. If the borrower fails to comply, the lender has the right to initiate foreclosure proceedings.
When Do Lenders Enforce a Due-On-Sale Clause?
While the due-on-sale clause gives lenders the option to accelerate the loan upon transfer of ownership, enforcement is discretionary. Lenders typically invoke this clause when:
● The borrower attempts to transfer the property without notifying the lender.
● Interest rates have risen, giving lenders an incentive to require new financing at current rates.
● The lender perceives an increased risk of default with an unapproved buyer assuming the mortgage.
However, lenders may choose not to enforce the clause if the loan remains in good standing and market conditions do not favor enforcing acceleration.
Exceptions to the Due-On-Sale Clause
While the due-on-sale clause is enforceable under federal law (specifically, the Garn-St. Germain Depository Institutions Act of 1982), certain exemptions exist. Lenders cannot invoke the clause when a property transfer occurs under the following circumstances:
● Transfer to a spouse or child due to death or divorce.
● Inheritance of the property by a relative who occupies the home.
● Transfer to a living trust where the borrower remains the beneficiary and occupant.
● Joint tenancy survivorship, where a co-owner inherits the property upon the borrower’s death.
These exceptions protect homeowners and their families from immediate loan acceleration due to life changes.
Due-On-Sale Clause in Deed of Trust States
In states like Texas, California, North Carolina, Georgia, and Virginia, real estate transactions often involve a deed of trust rather than a mortgage. The main differences are:
● A neutral trustee holds legal title to the property until the loan is repaid.
● If a borrower defaults, the lender can foreclose without court approval (non-judicial foreclosure), making enforcement faster than traditional mortgages.
However, both mortgages and deeds of trust include due-on-sale clauses, making them equally enforceable regardless of the legal instrument used.
Key Takeaways
● A due-on-sale clause allows lenders to demand full repayment of a mortgage when ownership is transferred without lender consent.
● Lenders typically enforce the clause when they see financial benefits, such as rising interest rates or increased default risk.
● Federal law provides exemptions for transfers due to inheritance, divorce, living trusts, and survivorship rights.
● In Texas and other deed of trust states, lenders can bypass lengthy foreclosure processes and enforce the clause more quickly.
Consult a Real Estate Attorney
If you’re considering transferring ownership of a mortgaged property, consulting a real estate attorney is highly recommended. They can help navigate due-on-sale clauses and explore legal options to protect your interests while ensuring compliance with lender agreements.
Contact Us
If you’re considering owner financing in Texas, the experienced team at Guerra Days Law Group is here to assist.
● Email: service@guerradays.com
● Phone: (281) 760-4295
● Office Address: 515 N Sam Houston Pkwy E, Ste. 250, Houston, Texas 77060
Let us help you navigate the complexities of owner financing and achieve your real estate goals. For more guidance on due-on-sale clauses and real estate transactions in Texas, contact Guerra Days Law Group today.