What is a due on sale clause?

A due on sale clause is a provision found in many mortgage agreements that allows the lender to demand full repayment of the loan upon the sale or transfer of the property. This means that if the current owner sells their property or transfers it to another party, the outstanding loan balance becomes immediately due and payable. This clause protects the lender’s interest by ensuring that the debt will be settled if the property changes ownership, rather than allowing the buyer to take over the existing mortgage terms.

This provision is particularly important because it prevents buyers from assuming the seller's mortgage with potentially favorable terms without the lender's approval, which could pose a risk to the lender if the buyer defaults. By requiring repayment, the lender can reassess the loan under new conditions and decide whether to offer financing to the new owner based on their criteria.

In understanding the context of the other options: an option describing a reduction in the selling price does not relate to mortgage repayment at all. The mention of financing that includes interest-only payments does not pertain to the sale or transfer of property. Finally, the claim about keeping existing mortgage terms misrepresents the due on sale clause, which actually restricts that ability in most circumstances.