National Real Estate Exam (PSI)FinancingHard
A property owner sells a home subject to an existing mortgage without notifying the lender. The mortgage contains a clause allowing the lender to demand full repayment upon transfer of title. This clause is known as a:
- ADefeasance clause
- BDue-on-sale clause
- CPrepayment penalty clause
- DSubordination clause
Show answer & explanationAnswer & explanation
Correct answer: B. Due-on-sale clause
A due-on-sale clause gives the lender the right to accelerate and demand full payment of the loan balance if the property is sold or title is transferred without the lender's consent.
Why the other options are wrong
- A. A defeasance clause requires the lender to release the lien once the debt is paid.
- C. A prepayment penalty clause charges a fee for early payoff, unrelated to transfer of title.
- D. A subordination clause affects lien priority, not transfer of title.
Due-on-Sale Clause
A mortgage provision allowing the lender to require full repayment of the loan balance if the property is sold or title is transferred.
- Also called an acceleration clause upon sale
- Prevents unauthorized loan assumption
- Common in most conventional mortgages
Memory trick: Sell the house, the whole loan comes due at once.