Mortgages often have 'due on sale' provision

Mailbag

December 27, 1998

R. M. Norwood of Severn asks whether mortgages on property must be paid off when the property is sold. He wants to know if it is "unlawful or unethical to sell property without satisfying the liens."

Mr. Norwood, when a mortgage (or deed of trust) is recorded in the land records where real property is located, the mortgagee constitutes a lien on the real estate. The "lien" means that the mortgage holder can sell the property by a judicial sale if the debt is not paid according to its terms.

Many mortgages contain a "due on sale" clause. This provision allows the mortgage holder to declare the balance of the debt due and payable upon a sale or other transfer of the mortgaged property. When a mortgage includes a "due on sale" clause, the buyer knows that the mortgage lien must be satisfied upon demand of the holder when the buyer takes title.

A bank or commercial lender that finances the purchase of real estate will almost always require prior mortgages and other liens be paid off, so the new lender will have a first lien on the property. In almost all cases, when a mortgage contains a "due on sale" clause or when a new lender insists on having a first lien, an existing mortgage will be satisfied when the property is sold.

You should be aware that some mortgages do not include "due on sale" provisions. These mortgages are assumable by BTC purchasers. When a mortgage is "assumable," the mortgage holder has no right to require payment in full upon transfer of the property. The purchaser of property subject to an assumable mortgage simply continues to make payments at the times and on the amounts specified in the mortgage instrument. The holder of an assumable mortgage must accept these payments.

You should review your particular mortgage to see if it contains a "due on sale" clause. If it does, the instrument should spell out the rights of the mortgage holder to demand and obtain full payment. If your mortgage does not contain a "due on sale" provision, you may have to continue to accept payments at the times and in the amounts specified.

When a debtor fails to pay a validly recorded mortgage when it is due, the mortgage holder can foreclose against the property even if it has been transferred to a new owner. Often the mortgage will allow the holder to recover attorney's fees and expenses incurred by selling the property at a court-ordered auction sale. A mortgage holder usually has substantial legal rights against the property and the individuals who signed the mortgage.

Pub Date: 12/27/98

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