A due-on-sale clause helps protect the lender, or mortgage holder, from the risk that the ownership may be transferred to a new owner upon sale of the property.
Because of the due-on-sale clause, when you sell your house you cannot transfer your mortgage to the buyer. You must use the sale proceeds to pay off your mortgage, and the buyer must obtain a new mortgage. If it were not for the due-on-sale clause, the mortgage could be assumed by buyers who might not otherwise qualify for the loan.
Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses changes (for example, the property was jointly owned and becomes owned by a single spouse), the lender cannot enforce the due-on-sale clause.
The same is true if the owner transfers the property to his or her children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.