What is an alienation clause in real estate?

Quick insights

• The alienation clause allows lenders to pay off the remaining balance of the loan if the property is sold or transferred to a new owner.
• Exceptions include assumable mortgages, death of the borrower, transfers to family and government programs like FHA loans.
• To manage the alienation clause, carefully review your loan agreement and consult with a Home Lending Advisor to understand your options for transfer or assumption.

The alienation clause plays a significant role in protecting lenders by ensuring they have control over who assumes the mortgage if a property is sold or transferred. Whether you’re buying, selling or transferring a property, understanding how this clause works could be key for making sound decisions about your mortgage and property transfer options.

What is an alienation clause?

An alienation clause, often called a due-on-sale clause, is typically part of many mortgage agreements. It’s a rule that states if you sell your property, the loan provider can require you to pay off your entire mortgage balance right away. This clause is mainly in place to protect the lender. If the property changes hands, the lender wants to make sure it’s not left with a loan being paid by someone they haven’t evaluated and approved.

Here are some key characteristics of alienation clauses:

• Can apply to both sales and transfers: The clause can be triggered not just by a sale, but also by transferring the title of the property to someone else (like a gift).
• Helps lenders manage risk: By exercising this clause, lenders ensure that they aren’t stuck with a loan that’s been passed to someone who might not be able to repay.
• Interest rate protection: If interest rates rise, the lender may want to “call” the loan if a property is sold. This could allow them to re-lend the money at a higher rate to the new owner.

How does the alienation clause work

The alienation clause allows the lender to demand full repayment of the loan if the property is sold or transferred. This way, the lender can approve who is responsible for the mortgage.

Example scenario:

You purchased a home with a mortgage of $250,000. After living in the house for a few years, you decide to sell it for $300,000. The buyer wants to take over the mortgage, assuming the loan with the same terms. Because of the alienation clause in your mortgage contract, the lender says “No, we don’t allow the loan to be assumed by the new buyer.” The lender demands that you pay off the $250,000 mortgage balance before the sales can go through.

In this scenario, the new buyer would need to get their own loan. This protects the lender from having the loan transferred to an unapproved borrower.

Alienation vs. acceleration clause

An alienation clause and an acceleration clause are both provisions that can be found in mortgage agreements; however, each serves a different purpose. The alienation clause allows the lender to demand full repayment of the loan if the property is sold or transferred. Meanwhile, an acceleration clause lets the lender demand immediate repayment of the entire loan balance if the borrower defaults on the loan or violates the terms of the agreement. Below is a comparison of each clause:

Purpose:

• Alienation clause: Guarantees full repayment if the property is sold or transferred.
• Acceleration clause: Guarantees full repayment if the borrower defaults or breaches the loan terms.

When it’s activated:

• Alienation clause: Activated when the property changes ownership (sale, transfer or sometimes inheritance).
• Acceleration clause: Activated when the borrower misses payments or violates other terms.

Focus:

• Alienation clause: Focuses on ownership changes, protecting the lender from an unexpected transfer of responsibility.
• Acceleration clause: Focuses on the borrower’s behavior, giving the lender a way to recoup the loan balance if payments are missed or terms are broken.

Common in:

• Alienation clause: Typically found in conventional home loans, especially those with fixed interest rates.
• Acceleration clause: Found in almost all mortgage agreements, as it provides the lender with a safeguard against default.

Exceptions to the alienation clause

Whether a mortgage has an alienation clause depends on the lender and terms of the loan. Exceptions help provide flexibility in situations where transferring the property doesn’t necessarily increase the lender’s risk. Here are several scenarios when an alienation clause may not apply:

• Assumable mortgage: With this type of mortgage, the buyer can take over the seller’s mortgage with the lender’s approval, bypassing the alienation clause.
• Death of the borrower: If the borrower passes away, the loan may transfer to heirs or a beneficiary without triggering the alienation clause, depending on the terms of the mortgage.
• Transfer to spouse or family: In some cases, transferring the property to a spouse or close family member (such as in a divorce) may not activate the alienation clause.
• Foreclosure: If the lender forecloses on the property due to default, the alienation clause doesn’t apply, as the lender is taking ownership of the property.
• Living trust transfer: If the property is transferred into a living trust (where the borrower remains the beneficiary), the alienation clause is not typically triggered, as the borrower still retains control.
• Government programs: Certain government-backed loans, like FHA or VA loans, may have specific rules that allow for the transfer of the mortgage without triggering the alienation clause.

Alienation clause and FHA loans

Alienation clauses can be included in FHA loans. While FHA loans are often assumable—meaning the buyer can take over the loan with the lender’s approval—the alienation clause still gives the lender the right to demand full repayment if the property is sold or transferred. However, if the buyer qualifies and the lender agrees, the alienation clause may not be triggered, allowing the mortgage to be assumed without full repayment.

 How to navigate the alienation clause

To navigate the alienation clause, it’s important to understand its implications. Here’s how you could approach it:

• Review loan documents: Read your mortgage agreement to understand the terms and any exceptions related to the alienation clause.
• Consult with professionals: Consider speaking to a Home Lending Advisor and real estate attorney to clarify how the clause applies and whether the loan is assumable, helping you plan your next steps.

By reviewing your loan documents and getting professional advice, you can make informed decisions about how to handle the alienation clause when selling or transferring your property.

In conclusion

The alienation clause can impact your ability to transfer or sell your property. Knowing how this clause works, along with potential exceptions, is important when navigating loan documents. Consulting with a Home Lending Advisor can help you avoid surprises and explore options in property ownership or transfers.