Due-on-Sale Clause
Creative FinanceThe due-on-sale clause (also called an acceleration clause or alienation clause) is standard language in nearly every US residential mortgage. It gives the lender the right — not the obligation — to demand immediate full repayment of the loan if the property is sold or transferred. This clause is the central legal risk in every subject-to and wraparound-mortgage transaction.
How it works. The clause sits in the mortgage or deed of trust, usually referencing the Garn-St. Germain Act of 1982, which codified lenders’ right to enforce it. If the property changes hands — whether by sale, assignment, or sometimes even transfer into an LLC — the lender can theoretically “call” the loan due. If you can’t pay it off, the lender can foreclose.
In practice, lenders rarely enforce the due-on-sale clause as long as payments keep arriving on time. The bank’s business is collecting interest, not foreclosing on performing loans. Tens of thousands of subject-to deals close every year without the loan being called. But the risk is not zero, and you should never enter a subject-to deal without understanding it.
Mitigating the risk. Most investors use a land trust with a beneficial-interest assignment or an LLC membership-interest transfer to keep the transaction off the public record. Title insurance, a competent closing agent, and a reserve fund to handle a worst-case payoff all reduce exposure. For the full picture, see subject-to loan assumption and the hybrid subject-to plus seller-finance structure.