Due on Sale Clause

When you buy property "subject to" an existing loan, you keep the seller's financing in place instead of paying it off at closing. Title moves to you, but the loan stays in the seller's name. This is where the due-on-sale clause becomes critical.

Most modern mortgages contain a due-on-sale clause. It gives the lender the contractual right to accelerate the loan and demand full payoff if the property is sold or transferred without the lender's consent. In other words, a typical subject-to transfer is exactly the kind of transaction that can trigger the clause.

In practice, lenders do not automatically call every loan due just because ownership changed. They usually care most about:

• Whether payments are current and on time
• Whether taxes and insurance are paid
• Whether there is a clear risk or problem on the loan or the property

However, it is important to understand that this is a business choice, not a legal limitation. The legal right to accelerate exists as soon as the transfer occurs. If the lender discovers the transfer and decides to enforce the clause, you must either pay off or refinance the loan, or risk foreclosure based on a default created by the transfer.

Because of this, sophisticated buyers treating subject-to financing as a strategy build their entire structure around the presence of the due-on-sale clause. It affects how they take title, how they communicate with the seller, and how they plan for an eventual exit or refinance.

The due-on-sale clause is broad, but it is not unlimited. Federal law, particularly the Garn–St. Germain Depository Institutions Act, and standard mortgage forms spell out circumstances where lenders either cannot, or commonly do not, enforce acceleration solely because of a transfer.

Common exceptions and carve-outs

Depending on the loan type and governing law, the following situations are often treated differently from a simple sale to a third party:

• Transfers to a spouse or child on the borrower's death
• Transfers between spouses in connection with divorce or separation
• Certain transfers into a borrower's revocable living trust, provided the borrower remains a beneficiary and occupies the property when required by the loan
• Creation of junior liens (like a second mortgage) that do not transfer ownership

These are not "loopholes" for subject-to deals, but they explain why some ownership changes do not trigger a call while others clearly can.

Risk management for buyers using subject-to strategies

If you rely on subject-to financing, you are taking on due-on-sale risk. You cannot eliminate that risk completely, but you can manage it.

• Underwrite the deal assuming a future refinance. Make sure the numbers still work if you have to refinance at a higher rate or on less favorable terms.
• Maintain pristine payment history. Late payments or lapses in taxes and insurance are among the fastest ways to attract lender scrutiny.
• Keep reserves. A cash cushion gives you options if a lender calls the loan and you need to refinance or sell faster than planned.
• Use clear written agreements with the seller. Spell out who is responsible for payments, what happens if the lender accelerates, and how you will handle communication with the lender.
• Consult qualified legal counsel in the property's jurisdiction. Due-on-sale enforcement practices, and advice on how to structure subject-to transactions, can vary meaningfully by state and by loan type.

Handled thoughtfully, subject-to financing can be a useful tool, but the due-on-sale clause is the central constraint. Treat it as a known, non-negotiable feature of the deal, build your plan around it, and make sure everyone involved understands both the benefits and the risk.