What Is an Alienation Clause?
The term alienation clause refers to a provision commonly found in many financial or insurance contracts, especially in mortgage deals and property insurance contracts. The clause generally only allows the transfer or the sale of a particular asset to be done once the main party fulfills its financial obligation.
Key Takeaways
- An alienation clause voids certain contractual obligations to an asset if that asset is sold or if ownership is transferred to another entity.
- These clauses are common in mortgage loans, which release borrowers from the lender once the property has been transferred to a new owner.
- Alienation clauses also exist in insurance policies on any property that's been sold.
Understanding Alienation Clauses
Alienation clauses—also referred to as due-on-sale clauses—are usually a standard, especially in the mortgage industry. So it's hard to find a mortgage contract that doesn't have some type of alienation clause. Lenders include the clause in mortgage contracts for both commercial and residential properties so new buyers can't take over an existing mortgage. This ensures the lender that the debt will be fully repaid in the event of a real estate sale or if the property is transferred to another party. The alienation clause essentially releases the borrower from their obligations to the lender since the proceeds from the home sale will pay off the mortgage balance.
Alienation clauses are also called due-on-sale clauses.
They are also included in property insurance policies. In residential and commercial property insurance contracts, alienation clauses release an account holder from paying insurance on a property if property ownership is transferred or if the property is sold. This release also requires the new homeowner to obtain new insurance in their name for the property in the future.
Alienation Clause Terms
Mortgage alienation clauses prevent assumable mortgage contracts from occurring. An alienation clause requires a mortgage lender to be immediately repaid if an owner transfers ownership rights or sells a collateral property. These clauses are included for both residential and commercial mortgage borrowers.
If an alienation clause is not included in a mortgage contract, the owner may be free to transfer the mortgage debt to a new owner in an assumable mortgage contract. Assumable mortgage contracts allow a new owner to take over the previous owner’s remaining debt obligations, making the scheduled payments to the mortgage creditor under the same terms as the previous borrower. Assumable mortgage contracts are not common, however, they could be used if an owner is in fear of disclosure and does not have an alienation clause in their mortgage contract. An assumable mortgage contract can help a distressed borrower to relieve their debt obligations through a simplified transfer process.
Mortgage lenders structure mortgage contracts with alienation clauses to ensure immediate repayment of debt obligations from a borrower. Nearly all mortgages have an alienation clause. An alienation clause protects the lender from unpaid debt by the original borrower. It ensures that a creditor is repaid in a more timely manner if a borrower has issues with their mortgage payments and is unable to pay. Alienation clauses also protect a lender from third party credit risk which would be associated with a new borrower taking on anassumable mortgage contract since the new borrower has a significantly different credit profile.
FAQs
An alienation clause, also known as a due-on-sale clause, is a real estate agreement that requires a borrower to pay the remainder of their mortgage loan balance off immediately during the sale or transfer of a property title and before a new buyer can take ownership.
What is an alienation clause quizlet? ›
Alienation clause. This clause allows the lender to demand the entire loan balance due when title to the property is transferred or in some cases, upon change of possession.
What is the meaning of alienation in real estate? ›
Alienation refers to the process of a property owner voluntarily giving or selling the title of their property to another party. When property is considered alienable, that means the property is able to be sold or transferred to another party without restriction.
Which of the following normally triggers an alienation clause? ›
An alienation clause voids certain contractual obligations to an asset if that asset is sold or if ownership is transferred to another entity. These clauses are common in mortgage loans, which release borrowers from the lender once the property has been transferred to a new owner.
What is an example of an alienation clause? ›
Alienation Clause Example
If the Borrower sells the Property, or any part of the Property, or any interest in the Property without such consent, the Lender may, at its option, declare the entire unpaid balance of this Mortgage Loan to be immediately due and payable."
What are acts of alienation? ›
Alienation occurs when a person withdraws or becomes isolated from their environment or from other people. People who show symptoms of alienation will often reject loved ones or society. They may also show feelings of distance and estrangement, including from their own emotions.
What is the anti alienation clause? ›
An Anti-alienation clause is a provision in the governing document for an arrangement such as a trust that specifies that the beneficial or equitable owner of the property held in that arrangement cannot transfer the interest to a third party.
Is alienation always bad? ›
Alienation sometimes seems necessary but the result is mostly negative.
Is alienation a bad thing? ›
Feelings of alienation are an important indicator of mental well-being and have been associated with depressed mood, anxiety symptoms, alcohol use disorders, psychological distress, insomnia, post-traumatic stress disorder, and increased risk of suicide.
What are the four types of alienation explained? ›
In the Economic and Philosophic Manuscripts, Marx discusses four aspects of the alienation of labour, as it takes place in capitalist society: one is alienation from the product of labour; another is alienation from the activity of labour; a third is alienation from one's own specific humanity; and a fourth is ...
Involuntary alienation is the transfer of title to real property as a result of a lien foreclosure sale, adverse possession, filing a petition in bankruptcy, condemnation under power of eminent domain, or, upon the death of the titleholder, to the state if there aren't any heirs.
What are examples of involuntary alienation? ›
Answer and Explanation: Involuntary alienation is transferring title to a property, which takes place due to the foreclosure sale, bankruptcy, and death of the property owner or when there is no heir of the property.
What does alienation may be voluntary or involuntary? ›
In conclusion, voluntary and involuntary alienation are two fundamental concepts in real estate. While one involves intentional and willing transfers of ownership, the other pertains to situations where ownership changes hands without the owner's consent.
What does alienation mean in a lease? ›
'Alienation' is the right granted in a lease for a tenant to assign, sublet, or share occupation of their property. This is an important factor for tenants when negotiating leases and so this guide will discuss the main alienation provisions in a lease from a tenant's viewpoint. Assignment.
What is an alienation clause in a trust deed to the advantage of the? ›
An alienation clause is language in a mortgage or trust deed that allows the lender to call the loan immediately due and payable in the event the owner sells or transfers title to the property.
What is the alienation clause in a foreclosure? ›
What Is An Alienation Clause? In real estate, an alienation clause, or due-on-sale clause, refers to contract language that requires the borrower to pay the full mortgage balance, as well as accrued interest, back to the lender before they can transfer the property to a new buyer.
What does alienate mean in the black law dictionary? ›
Definition & Citations:
To convey; to transfer the title to property. Co. Litt. 1186. Alien is very commonly used in the same sense.
