California Real Estate Practice Exam

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What does a ‘due-on-sale’ clause in a mortgage require?

Accelerated repayment of the loan upon sale of the property
Immediate foreclosure in case of missed payments
Adjustment of the interest rate upon completion of sale
Mortgage assumption by new buyer

The correct answer is: Accelerated repayment of the loan upon sale of the property

A 'due-on-sale' clause in a mortgage stipulates that the full balance of the loan must be repaid when the property is sold. This means that if the borrower decides to sell the property, the lender has the right to demand immediate repayment of the outstanding mortgage balance. This provision protects the lender by preventing the loan from being transferred to an unqualified buyer without the lender's consent, thereby maintaining the lender's ability to assess risk and adjust terms if necessary. In the context of real estate transactions, this clause is significant because it can affect the transferability of the property and influence negotiations during a sale. If a property has a due-on-sale clause, sellers must factor in the need to pay off the existing mortgage, which can influence pricing, timing, and the overall terms of the sale.