Fat Chance Productions/Getty Images
Key takeaways
- The alienation clause is common in mortgages, giving a mortgage lender the right to request full and immediate loan repayment when the home is sold or transferred.
- The Garn-St. Germain Act of 1982 overrides state law to make this clause enforceable nationwide, with a few exceptions.
- An alienation clause is different from an acceleration clause in that the latter typically has to do with non-payment and foreclosure instead of a sale or transfer.
An alienation clause, or due-on-sale clause, is common in most mortgage contracts. But what is alienation in real estate? This is a provision that requires a home seller to repay their mortgage balance at the time of sale. Here’s what that means for the current homeowner and, sometimes, for the homebuyer as well.
What is an alienation clause in real estate?
Key terms
- Alienation clause
- The alienation clause in a mortgage contract gives the lender the right to request the full and immediate repayment of the loan, including principal and interest, when the borrower sells or transfers their home.
An alienation clause makes it a requirement to settle the outstanding balance before the property’s title can be transferred to the buyer. Since the loan becomes due on sale, this provision is also known as the due-on-sale clause. This stipulation applies regardless of whether the sale or transfer is voluntary or involuntary.
In the 1970s, there was some back-and-forth about the enforceability of alienation clauses. Some states allowed them, some didn’t. As a result, Congress passed the Garn-St. Germain Act (officially the Garn-St. Germain Depository Institutions Act) in 1982, which officially made the clauses enforceable (with a few exceptions, which we’ll cover below). Specifically, Title II of the act preempted state laws that thwarted the due-on-sale or alienation clauses in mortgage contracts.
Alienation vs. acceleration clause
When comparing an alienation clause vs. an acceleration clause, there are many similarities. Both make it possible for mortgage lenders to demand full, immediate repayment of the loan all at once, ahead of the stated loan term. The difference between an alienation clause and an acceleration clause is that the contract language around the acceleration clause typically centers on instances of non-payment and foreclosure rather than a sale or transfer.
In some circ*mstances, other issues can trigger loan acceleration, as well, such as canceling homeowners insurance, failing to pay property taxes or filing for bankruptcy.
How does the alienation clause work?
The alienation clause assures the lender that the borrower will repay the funds. This clause also necessitates that the borrower notify the lender before transferring or assigning the mortgage to anyone else.
Most importantly, an alienation clause prevents a homebuyer from assuming the current mortgage on the property. Without this clause, the new owner could assume the existing mortgage and repay it at that interest rate rather than obtaining a new loan at prevailing rates.
For the seller, the alienation clause means they must settle their mortgage debt on the day the transaction goes through. Often, they will pay the balance off with the sale proceeds, handing a check to the lender’s rep at the closing.
Exceptions to the alienation clause
In most cases, mortgage lenders enforce the alienation clause, but there are exceptions when the borrower can transfer the mortgage to someone else without triggering the clause, and therefore without needing to pay back the mortgage. These are as follows:
- Death: The borrower passes away and the property is transferred to a joint owner or bequeathed to a relative
- Divorce: The property transfers during a divorce or legal separation
- Living trust transfer: The property is transferred to a living trust
- Direct transfer to next-of-kin: The property transfers to a spouse or child during the borrower/owner’s lifetime
- Second mortgage: The owner obtains a second mortgage on the home, such as a home equity loan
- Assumable mortgage: There is an assumable mortgage on the property, meaning that it doesn’t have an alienation clause. This would be the case if the mortgage originated in the 1970s or early 1980s, or if it is a certain type of government-backed loan (see below).
Keep in mind: While rare, mortgages with 40- and 50-year terms do exist. They are non-qualified or non-conforming loans, meaning they cannot be sold to major market-makers Freddie Mac or Fannie Mae and don’t adhere to standards set by the Consumer Finance Protection Bureau.
Alienation clause FAQ
While alienation clauses prevent homeowners from transferring their mortgage to a buyer before paying back their loan, assumable mortgages are almost the opposite. If a mortgage is assumable, it means that a buyer can take over the current mortgage — with its rate and terms intact. Alternatively, someone could assume a mortgage by inheriting a property from a deceased person or receiving it in a divorce proceeding.
If a borrower fails to make good on the alienation clause, the lender has the right to take legal action against the borrower.
Each home loan is its own agreement that is subject to specific terms and conditions, including an alienation clause. It is possible to refinance a home mortgage to remove the alienation clause, but they are pretty mainstream these days and are hard to get around. Refinancing also means you will have to repeat the entire mortgage process again, which can cost thousands and will have a temporary negative impact on your credit score.
An alienation clause is a common agreement made for both residential and commercial properties. However, there are some cases where an alienation clause does not apply. This includes circ*mstances like the transfer of a property after death or divorce, and a direct transfer to next-of-kin.
As a seasoned expert in real estate and mortgage matters, my extensive knowledge in this field allows me to delve into the intricacies of the alienation clause, shedding light on its significance and the legal landscape surrounding it. Let's break down the key concepts used in the provided article:
Alienation Clause in Real Estate: Unveiling the Essentials
1. Alienation Clause Defined:
- Expert Insight: The alienation clause, also known as the due-on-sale clause, is a pivotal element embedded in mortgage contracts. It grants the lender the authority to demand the complete and immediate repayment of the loan, comprising both principal and interest, when the homeowner sells or transfers the property.
2. Garn-St. Germain Act of 1982:
- Expert Insight: The Garn-St. Germain Act, enacted in 1982, holds paramount importance in the context of alienation clauses. It supersedes state laws, rendering the enforcement of these clauses nationwide, albeit with a few exceptions.
3. Alienation vs. Acceleration Clause:
- Expert Insight: Distinguishing between the alienation clause and the acceleration clause is crucial. While both empower lenders to demand full loan repayment before the stipulated term, the acceleration clause typically pertains to non-payment and foreclosure, unlike the alienation clause, which centers on property sale or transfer.
4. Operation of Alienation Clause:
- Expert Insight: The alienation clause functions as a safeguard for lenders, ensuring that borrowers settle outstanding balances before property title transfer. It imposes an obligation on borrowers to inform lenders prior to any mortgage assignment or transfer.
5. Exceptions to Alienation Clause:
- Expert Insight: Despite the general enforceability of alienation clauses, certain exceptions exist. Circ*mstances such as death, divorce, living trust transfers, direct transfers to next-of-kin, second mortgages, and assumable mortgages offer avenues for property transfer without triggering the clause.
6. Legal Implications and Enforcement:
- Expert Insight: Failure to comply with the alienation clause can lead to legal consequences for the borrower. Lenders retain the right to take legal action in the event of non-compliance.
7. Refinancing and Alienation Clause:
- Expert Insight: While it's possible to remove an alienation clause through refinancing, it's a challenging endeavor. Alienation clauses are prevalent in modern mortgage agreements, and the refinancing process entails repeating the entire mortgage process, incurring costs, and temporarily impacting credit scores.
8. Applicability in Residential and Commercial Properties:
- Expert Insight: The alienation clause is a standard feature in both residential and commercial property agreements. However, certain situations, such as property transfer after death or divorce, and direct transfers to next-of-kin, may exempt properties from the clause.
In conclusion, the alienation clause is a nuanced aspect of real estate transactions, intricately woven into mortgage contracts. Understanding its implications and exceptions is vital for both homeowners and potential buyers navigating the complexities of property transactions.
