Real estate can be dizzying, but an alienation clause in your home mortgage contract is easy to define. Let’s get started.
What Is an Alienation Clause?
You will find the words “alienation clause” in most mortgages. In real estate, the “due-on-sale clause” -don’t worry! In real estate, they mean the same thing.
An alienation clause requires that the existing loan be paid in full if the homeowner sells off the property. You can’t transfer the home title to a buyer if you don’t pay off your loans to the lender first.
A due-on-sale clause applies to residential, commercial, and property insurance contracts.
The alienation clause protects the lender and gets the terms in writing before you can pass the title off to another person. They’re pretty standard in many mortgages, but there might be one where you won’t see them.
The Assumable Mortgage
A mortgage that doesn’t have an alienation clause is assumable. It’s rare, but it allows you to do what an alienation clause prevents.
Even if you still have payments left on your home loan, you can transfer the title to another buyer. There’s no hassle – they can pick up whatever state you left the loans.
In short, the new owner can assume the loan of the old buyer.
Though alienation clauses are now universal, they were quite recent.
With the rising interest rates in the 1970s, alienation clauses became more popular. Some assumable mortgages may just never include an alienation clause or dates back to the 70s.
That said, the assumable mortgage isn’t the only exception when it comes to alienation clauses.
The Exceptions to Alienation Clauses in Mortgages
Thanks to the Garn-St. Germain Depository Institutions Act of 1982, there are some exceptions to alienation clauses.
This act responded to the changing market conditions and continues to protect homeowners and their property today!
Here are a few examples:
- Transfer to a living trust
- Transfer to the owner’s spouse or children
- Death
- Divorce
- Second mortgage
- FHA, USDA, and VA loans
In the event of a death, the buyer’s heirs don’t have to answer to an alienation clause. However, in real estate, they must plan to move in if they’re not already occupants.
It’s a similar case when transferring the deed to a living trust, spouse, or child. If the owner does a property transfer to a joint-tenant, it’s an exception to the mortgage terms, too.
When a divorce happens, there will be a change of ownership that doesn’t apply to the loans. The alienation clause need not apply to the mortgage contract.
With a second mortgage or home equity loan, it’s illegal for a lender to demand the alienation clause take effect.
What Triggers an Alienation Clause
If you’re the borrower or the homeowner, you can trigger the due-on-sale clause to take effect when you sell off the deed.
How an Alienation Clause Works
If the mortgage lender follows through with the alienation clause, the owner will have to pay the remaining mortgage loans in full. Lenders typically notify the owner ahead of time.
They may either speed the repayment up or have a set timeline in which mortgage payments have to be done.
Alienation Clause and Acceleration Clause: The Difference
Poking around the real estate market, you may have across the acceleration clause in mortgage contracts, too. Alienation clauses and acceleration clauses are quite similar in real estate, but they’re not the same.
Technically, alienation clauses under an acceleration clause.
What Happens?
This clause takes effect when you breach terms in your mortgage contract. Like a due-on-sale clause, a borrower must pay off the loan balance in full.
While normally used for late payments to the mortgage debt, there are other instances that an acceleration clause. One is transferring or selling off the properties in the mortgage agreement.
Sound familiar? Yes, that’s how we define an alienation clause in mortgage contracts.
The Aftermath
After the breach happens, the borrower must pay off the remaining mortgage balance.
Both clauses exist to protect lenders from the consequences of a default. You can have ownership of the entire property after you pay off the entire balance.
Some Things to Consider
Before we wrap this article about the alienation clause in real estate, let’s have a brief rundown of things to remember.
Always Read the Fine Print
You know the difference between acceleration and an
alienation clause but you should still clarify what’s going to happen to your property.
Ask about your account, research housing market conditions, and know what’s in your best interest. This advice also goes before investing in any property!
Look over your mortgage contract, trust deeds, and
terms. You might be surprised at what you’ll find. Besides, you never know if you have a loan contract that doesn’t have the due-on-sale clause!
Know About Other Clauses
The Defeasance Clause
Once all the loan has been paid off, the defeasance clause ensures buyers get the property. While some states may not require this clause, it’s still better to get your assurance in writing!
The Release Clause
After you pay off your entire loan – plus the interest rate – the release clause frees up the portion of property lenders had their claim over.
In Conclusion
Keeping yourself informed is in your best interest when dealing with real estate.
As a new owner or borrower, it can become confusing. You don’t want to accidentally set something off that’ll force a lender to ask for full payment.
So, read and reread your contract. Know what happens when you transfer over your title to other buyers and what your interest rates are like after the transfer.
We hope you enjoyed this article! Whether you’re a new borrower or you’re simply in search of proper real estate definitions, we hope we helped. Keep yourself safe!
