A loan provision requiring the full balance to be paid when the property is sold or transferred.
Why Due-on-Sale Clause matters on the exam
This term belongs to Financing. The questions below are real items from Freehold's bank that use it - each one cites its source.
Exam questions using Due-on-Sale Clause
Every Freehold question shows why the right answer is right — and cites its source.
A due-on-sale clause gives the lender the right to:
Increase the down payment requirement retroactively
Force the borrower to refinance annually regardless of whether the property has been sold or transferred
Require full repayment of the loan if the property is sold or transferred without lender consent
Automatically approve any buyer who assumes the loan without any review of that buyer's creditworthiness
Show answer & explanation
Require full repayment of the loan if the property is sold or transferred without lender consent — A due-on-sale, or alienation, clause allows the lender to call the loan due in full if the borrower transfers title without the lender's consent, effectively preventing unauthorized assumptions.
Source: PSI National Real Estate Exam Content Outline §4 Financing
A due-on-sale clause is also commonly known as a(n):
Defeasance clause
Escalation clause
Exculpatory clause
Alienation clause
Show answer & explanation
Alienation clause — Because it is triggered by the borrower's alienation, or transfer, of the property, the due-on-sale clause is also called an alienation clause.
Source: PSI National Real Estate Exam Content Outline §4 Financing
A wraparound mortgage arrangement is most likely to be used when:
The existing loan carries a due-on-sale clause that will definitely be enforced
The seller wants to immediately pay off the existing loan
The existing loan has a favorable interest rate and can remain in place without triggering acceleration
The buyer qualifies easily for conventional financing
Show answer & explanation
The existing loan has a favorable interest rate and can remain in place without triggering acceleration — Wraparound financing works best when the underlying loan carries a favorable rate and either has no due-on-sale clause or the lender is unlikely to enforce it, letting the seller profit from the rate spread.
Source: PSI National Real Estate Exam Content Outline §4 Financing
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