Due-on-Sale Clause
A mortgage provision letting the lender demand full repayment if the property is sold or transferred without the lender's consent.
A due-on-sale clause (also called an alienation clause) gives a lender the right to call the entire loan balance due if the borrower sells or transfers the secured property without the lender's permission. It exists so a lender is not forced to keep a below-market loan in place after the original borrower walks away.
For the owner-finance and note world, the due-on-sale clause matters in two very different situations.
When you create a note
If you, the seller, own the property free and clear, there is no underlying lender and no due-on-sale clause to worry about — you can finance the sale and create a clean first-lien note. This is the ideal note to sell.
If instead you sell on terms while a bank loan is still in place underneath — for example through a wraparound mortgage or a "subject-to" deal — the underlying lender's due-on-sale clause is still live. Transferring the property could trigger the lender's right to demand payoff. Lenders do not always enforce it, especially while payments keep coming, but the right exists and is a real risk a note buyer will scrutinize.
Why note buyers care
When you sell a note secured by a property that has an underlying mortgage, the buyer inherits due-on-sale exposure: if the senior lender ever calls its loan, the collateral position is threatened. That risk lowers the price or, for many retail buyers, takes the note off the table entirely. First-lien notes on free-and-clear property avoid this issue and command the best pricing — which is why many buyers, including specialists that buy only first liens, prefer them.
The Garn-St. Germain exceptions
Federal law (the Garn-St. Germain Depository Institutions Act of 1982) bars lenders from enforcing due-on-sale in certain transfers — for instance, transfers to a spouse or child, transfers into the borrower's own living trust, or transfers resulting from death or divorce. These exceptions are narrow and are not a green light for investor wraps, but they explain why some family transfers do not trigger the clause.
Bottom line
A due-on-sale clause rarely affects a straightforward first-lien owner-financed note on a free-and-clear home. It becomes important whenever there is an underlying loan beneath your note. Disclose any senior financing up front — it is one of the first things a serious note buyer checks.