What is a due-on-sale clause and how does it affect loan assumption?

What is a due-on-sale clause and how does it affect loan assumption?

• A. It allows a buyer to assume the loan without lender approval.
• B. It allows the lender to transfer the loan to another borrower automatically.
• C. It requires repayment of the loan if the property is sold; can prevent assuming the loan by the buyer unless lender approves.
• D. It sets the sale price to the appraised value.

Answer: (C)

The main concept is that a due-on-sale clause gives the lender the right to demand full repayment of the loan when ownership of the property changes, which directly impacts loan assumption. When the property is sold, the loan can be accelerated, meaning the remaining balance becomes due immediately. Because of this, a buyer cannot simply assume the existing loan and take over the payments unless the lender approves the assumption and the new borrower meets underwriting criteria. This protects the lender by ensuring they can evaluate and approve who carries the loan or require payoff or refinancing. The other options don’t fit because a due-on-sale clause does not automatically transfer the loan to another borrower, nor does it set the sale price to appraised value.

The main concept is that a due-on-sale clause gives the lender the right to demand full repayment of the loan when ownership of the property changes, which directly impacts loan assumption. When the property is sold, the loan can be accelerated, meaning the remaining balance becomes due immediately. Because of this, a buyer cannot simply assume the existing loan and take over the payments unless the lender approves the assumption and the new borrower meets underwriting criteria. This protects the lender by ensuring they can evaluate and approve who carries the loan or require payoff or refinancing.

The other options don’t fit because a due-on-sale clause does not automatically transfer the loan to another borrower, nor does it set the sale price to appraised value.