Homeowners are usually aware that if they don’t make their mortgage payments, they’ll likely lose the home to foreclosure. But not everyone knows that if you default on the deal in some other way, like by transferring the property to a new owner without paying off the loan, you might face foreclosure as well.
People who take out a home loan typically sign both a promissory note and mortgage (or deed of trust). These documents contain the terms of your loan. If you breach the agreement, you’ve defaulted on the deal. Most notably, if you fall behind in payments, you’ll be in default.
But if you fail to comply with the other terms of the loan contract, you’ll also be considered in default. The most frequent types of default—other than nonpayment—are:
(Learn more about what it means to default on a mortgage loan and the consequences of default.)
Most mortgage contracts contain what’s called a due-on-sale or due-on-transfer clause. This clause states that you must get the lender’s written consent before selling or transferring all or part of the ownership of the property. (This situation is different from when you sell your home and use the sale money to pay off the mortgage loan. The due-on-sale clause pertains to situations when the owner sells or transfers the home to a new owner—but doesn’t repay the loan.)
While due-on-sale clauses were designed to apply when the property is sold to a third party, these clauses apply to any new owner. So, even if the new owner of the property is a trust or business that you own, the due-on-sale clause could be triggered. If you don’t get permission before transferring or selling the home, you'll be in default and the lender can "accelerate" the debt (require you to pay back the entire mortgage loan), unless prohibited by law. (In a few situations, federal law permits the borrower to transfer the property without the lender’s permission.)
It’s usually up to the lender to decide whether to enforce a due-on-sale clause. In some cases, the lender might give you the opportunity to transfer the title back into your name so you can avoid acceleration.
If you don’t transfer the property back, in cases where you get this opportunity, or if you’re unable to repay the outstanding mortgage loan balance after acceleration, the lender can foreclose your home in the same manner as if you had fallen behind in payments. (To learn what to do—and what not to do—in a foreclosure, see Foreclosure Do’s and Don’ts. To get general information about foreclosure procedures in your state, see our Summary of State Foreclosure Laws.)
If you’re thinking about transferring your property to a new owner and want to find out if a due-on-sale clause is enforceable, consider talking to a real estate attorney. If you’re facing a foreclosure because the lender says you violated a due-on-sale clause, consider talking to a foreclosure lawyer to learn about different options for your situation.