California Real Estate SalespersonFinancingEasy
A homeowner sells a property 'subject to' the existing mortgage without notifying the lender. The mortgage contains a due-on-sale clause. Under California law, what is the lender's primary right upon discovering the transfer?
- AAccelerate the loan balance and demand immediate payment in full
- BRaise the interest rate to the current market rate without further action
- CAutomatically void the sale and reinstate the original owner
- DRequire the new owner to qualify for the loan within five years
Show answer & explanationAnswer & explanation
Correct answer: A. Accelerate the loan balance and demand immediate payment in full
A due-on-sale clause gives the lender the option to call the entire loan balance due immediately if the property is transferred without consent. The lender cannot unilaterally void the sale, and simply raising the rate or giving a grace period are not the clause's standard remedies.
Why the other options are wrong
- B. The clause does not authorize a rate change; it authorizes calling the loan due.
- C. Lenders cannot unwind a completed sale unilaterally; their remedy is contractual acceleration.
- D. There is no statutory 5-year grace period tied to due-on-sale clauses.
Due-on-Sale Clause
A loan provision allowing the lender to demand full repayment of the loan balance if the property is sold or transferred without lender approval.
- Also called an alienation clause
- Protects lender from an unapproved assumption at below-market rates
- Federal law (Garn-St. Germain Act) generally allows enforcement of these clauses
Memory trick: Sell without asking, loan comes calling (accelerates).