A due on sale clause is a clause found in a contract, or often in promissory notes, that grants the lender the right to fully recall the loan or what’s left of it in balance when a sale of the property or transfer of ownership occurs.
While the lender retain this right to demand full repayment of the outstanding balance, the lender is also under no obligation to do so.
As observed in the real world, many instances of creative financing techniques like owner financing and mortgages being assumed occur without lenders triggering the due-on-sale clause.
However, in a typical old-fashioned property transaction where a seller sells to a buyer, the balance on the existing mortgage is usually demanded in full.
Almost all mortgage contain such a clause as the lender has to protect it’s own interest.
For example, if a property is sold and the seller has no intention to fully pay off the outstanding loan, this could cause a flurry of fraud that exploits this loophole.
Even if a seller is fully committed to continue paying monthly payments diligently, there is always the risk that the seller’s cash might run out before the loan is fully settled.
Be mindful that this clause is not exclusive to mortgage contracts. They are also commonly used in loan contracts where the purpose of funds are meant to be used for acquiring assets.