Risk of Due on Sale Clause in a Subject-To Transaction and How to Mediate It
Selling or buying a home subject-to the existing mortgage can be a strategic move — but it’s not without risk. One of the biggest concerns in this type of transaction is the Due on Sale Clause.
Let’s break down what this clause means, why it matters, and how you can manage the risk without derailing the deal.
What Is the Due on Sale Clause?
The Due on Sale Clause is a provision found in most mortgage contracts. It states that if the property is sold or transferred without the lender’s consent, the lender has the right to demand the full balance of the loan immediately.
In a typical sale, the mortgage gets paid off at closing — so this clause isn’t an issue. But in a subject-to transaction, the existing mortgage stays in the seller’s name while the deed transfers to the buyer. That transfer technically triggers the clause, even if payments continue to be made on time.
Do Lenders Enforce It?
Here's the truth: Lenders rarely call the loan due.
Banks prefer their loans to perform — meaning they’re more interested in getting consistent payments than foreclosing and dealing with auctions, legal fees, and asset loss. In fact, federal law prohibits banks from profiting on foreclosures if the asset is sent to auction.
That said, the risk is still real. If a lender becomes aware of a transfer, they can call the loan due — and you need to have a strategy if that happens.
How to Mediate the Risk
Here are a few strategic options to reduce or manage the risk of the Due on Sale Clause in a subject-to deal:
1. Talk to the Bank Upfront
While not all lenders are open to subject-to deals, some are more cooperative than you might think. Transparency can go a long way.
✅ Explain the situation: Let the lender know that the buyer will be taking over payments, maintaining insurance, and ensuring the property remains in good standing.
✅ Ask for written acknowledgement (if possible): Some sellers have had success with banks simply noting the change, especially with smaller or local institutions.
2. Deed a Portion of the Property Back to the Original Owner
Another tactic is to retain partial ownership in the seller’s name. For example, the buyer may deed a small ownership percentage back to the seller — say 1% — so it appears the transfer was internal or done for estate or management reasons.
⚠️ This doesn’t guarantee protection, but it may minimize the likelihood of lender scrutiny, since the title hasn’t changed hands completely.
3. Use a Wraparound Agreement or Agreement for Sale
In some states, you can deed the property back to the seller temporarily and have the buyer re-purchase it under a formal Agreement of Sale or land contract.
📝 These contracts allow buyers to control and occupy the property while the deed remains in the seller’s name — avoiding a transfer that would trigger the Due on Sale clause.
It’s a bit more paperwork and legal nuance, but it’s one of the cleanest strategies to sidestep the clause entirely.
4. Refinance with an Equity Assurance Policy
If the buyer has strong enough credit and the property has sufficient equity, consider a refinance strategy with an Equity Assurance policy.
This structure allows the buyer to:
Pay off the old mortgage
Secure a new loan in their name
Provide a safety net in case of default
✅ This completely removes the Due on Sale clause risk, since the loan is no longer in the original seller’s name — and it strengthens the buyer’s position long-term.
Key Takeaway
The Due on Sale Clause is real — but it’s not always enforced, and it can be navigated with the right approach.
Whether you’re the seller or buyer in a subject-to deal, your best bet is to:
Understand your options
Work with a knowledgeable team
Have a plan ready in case the lender does come calling
✅ Need Help Navigating Subject-To Risks? Talk to Happy Home Savers.
At Happy Home Savers, we specialize in creative real estate solutions that work in the real world — not just on paper. From mediating due on sale clause risks to structuring legally sound deals, we’re here to help you make smart, safe moves.
📞 Schedule a free consultation today — and let’s talk about your property, your goals, and your peace of mind.
👉 Visit us at happyhomesavers.com
📧 Or email: smile@happyhomesavers.com
Knowledge is power. Protection is peace of mind. Let’s do both.
