What is an Alienation Clause?
An alienation clause is a provision in a mortgage contract that requires the borrower to pay off the entire outstanding loan balance if the property is sold or transferred to a new owner. This clause protects the lender by ensuring they can review and approve any new borrower before the property changes hands.
Also known as a “due-on-sale clause,” this provision gives lenders the right to demand full repayment when ownership transfers. Without this protection, a buyer could potentially assume an existing mortgage without the lender’s consent or credit evaluation.
How Does an Alienation Clause Work?
When a property with an alienation clause is sold, the clause is automatically triggered. At that point, the lender has the right to accelerate the loan, meaning the entire remaining balance becomes due immediately.
In practice, this means the seller must pay off their existing mortgage at closing, typically using proceeds from the sale. The buyer then secures their own financing based on their creditworthiness and current market interest rates.
Lenders benefit from this arrangement because it prevents them from being stuck with a borrower they never approved. It also allows them to issue new loans at current interest rates rather than maintaining older loans with potentially lower rates.
Real-World Application of Alienation Clauses in Real Estate
Alienation clauses appear in nearly all conventional mortgages issued today. When a homeowner decides to sell their property, the clause ensures a clean transaction where the existing loan is satisfied and the new buyer obtains fresh financing.
For example, if a homeowner purchased a property in 2010 with a 4% interest rate and sells in 2023 when rates are 7%, the alienation clause prevents the buyer from simply taking over the old, more favorable loan. The lender can then issue a new mortgage at current rates.
This provision also protects lenders from situations where property transfers to someone with poor credit or financial instability. Without the alienation clause, a lender could find themselves bound to a high-risk borrower they would never have approved initially.
How Alienation Clauses Are Used
Lenders include alienation clauses as standard language in mortgage documents to maintain control over who owes them money. When property changes hands, title companies and closing attorneys verify that the existing mortgage will be paid off at closing, satisfying the alienation clause requirements.
There are some exceptions where alienation clauses may not be enforced. These include transfers to a spouse in divorce proceedings, transfers to a relative upon death, or transfers into certain types of trusts. Federal law also restricts enforcement in specific situations, such as transfers to a surviving joint tenant.
Additionally, assumable loans—which are rare but exist with some FHA, VA, and USDA mortgages—allow buyers to take over existing financing with lender approval, effectively bypassing the alienation clause under specific conditions.
In Other Words
Simply put, an alienation clause means “if you sell the property, you must pay off the loan.” It prevents buyers from taking over your mortgage without the lender’s permission.
Think of it as the lender’s insurance policy that ensures they always have a say in who owes them money. Rather than being stuck with an unknown borrower, they get to issue a fresh loan with current terms and rates to a buyer they’ve properly vetted.
