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Key takeaways
- An alienation clause is common in mortgages, giving a mortgage lender the right to request full and immediate loan repayment when the home is sold or transferred.
- The Garn-St. Germain Act of 1982 overrides state law to make this clause enforceable nationwide, with a few exceptions.
- An alienation clause is different from an acceleration clause in that the latter typically has to do with non-payment and foreclosure instead of a sale or transfer.
An alienation clause is common in most mortgage contracts. But what is alienation in real estate? This is a provision that requires a home seller to repay their mortgage balance at the time of sale. Here’s what that means for the current homeowner and, sometimes, for the homebuyer as well.
What is an alienation clause in real estate?
An alienation clause is a provision in a mortgage contract requiring the seller to settle any outstanding balance — including any principal and accrued interest — before a property’s title can be transferred to the buyer. This stipulation applies regardless of whether the sale or transfer is voluntary or involuntary.
In the 1970s, there was some back-and-forth about the enforceability of alienation clauses. Some states allowed them, some didn’t. As a result, Congress passed the Garn-St. Germain Act (officially the Garn-St. Germain Depository Institutions Act) in 1982, which officially made the clauses enforceable (with a few exceptions, which we’ll cover below). Specifically, Title II of the act preempted state laws that thwarted the due-on-sale or alienation clauses in mortgage contracts.
Alienation vs. due-on-sale clause
The terms “alienation clause” and “due-on-sale clause” are interchangeable and mean the same thing. Since an alienation clause makes it so that the loan becomes due at the time of sale, this provision can also be called a due-on-sale clause.
Alienation vs. acceleration clause
When comparing an alienation clause vs. an acceleration clause, there are many similarities. Both make it possible for mortgage lenders to demand full, immediate repayment of the loan all at once, ahead of the stated loan term. The difference between an alienation clause and an acceleration clause is that the contract language around the acceleration clause typically centers on instances of non-payment and foreclosure rather than a sale or transfer.
In some circ*mstances, other issues can trigger loan acceleration, as well, such as canceling homeowners insurance, failing to pay property taxes or filing for bankruptcy.
How does the alienation clause work?
The alienation clause assures the lender that the borrower will repay the funds owed on a mortgage loan. This clause also necessitates that the borrower notify the lender before transferring or assigning the mortgage to anyone else.
Most importantly, an alienation clause prevents a homebuyer from assuming the current mortgage on the property. Without this clause, the new owner could assume the existing mortgage and repay it at that interest rate rather than obtaining a new loan at prevailing rates.
For the seller, the alienation clause means they must settle their mortgage debt on the day the transaction goes through. Often, they will pay the balance off with the sale proceeds, handing a check to the lender’s rep at the closing.
Exceptions to the alienation clause
In most cases, mortgage lenders enforce the alienation clause. However, there are exceptions when the borrower can transfer the mortgage to someone else without triggering the clause and, therefore, without needing to pay back the mortgage. These are as follows:
- Death: The borrower passes away, and the property is transferred to a joint owner or bequeathed to a relative.
- Divorce: The property transfers during a divorce or legal separation.
- Living trust transfer: The property is transferred to a living trust.
- Direct transfer to next-of-kin: The property transfers to a spouse or child during the borrower/owner’s lifetime.
- Second mortgage: The owner obtains a second mortgage on the home, such as a home equity loan.
- Assumable mortgage: There is an assumable mortgage on the property, meaning that it doesn’t have an alienation clause. This would be the case if the mortgage originated in the 1970s or early 1980s, or if it is a certain type of government-backed loan (see below).
Keep in mind: While rare, mortgages with 40- and 50-year terms do exist. They are non-qualified or non-conforming loans, meaning they cannot be sold to major market-makers Freddie Mac or Fannie Mae and don’t adhere to standards set by the Consumer Finance Protection Bureau.
Alienation clause FAQ
While alienation clauses prevent homeowners from transferring their mortgage to a buyer before paying back their loan, assumable mortgages are almost the opposite. If a mortgage is assumable, it means that a buyer can take over the current mortgage — with its rate and terms intact. Alternatively, someone could assume a mortgage by inheriting a property from a deceased person or receiving it in a divorce proceeding.
If a borrower fails to make good on the alienation clause, the lender has the right to take legal action against the borrower.
Each home loan is its own agreement that is subject to specific terms and conditions, including an alienation clause. It is possible to refinance a home mortgage to remove the alienation clause, but they are common these days and are hard to get around. Refinancing also means you will have to repeat the entire mortgage application and closing process again, which can cost thousands and will have a temporary negative impact on your credit score.
An alienation clause is a common agreement made for both residential and commercial properties. However, there are some cases where an alienation clause does not apply. This includes circ*mstances like the transfer of a property after death or divorce, and a direct transfer to next-of-kin.
