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Due on Encumbrance Clause

DEFINITION

Clause that permits a lender to accelerate the debt collection of a mortgage debt if the borrower obtains an additional loan such as a second or third loan.

EXPLANATION

A due on encumbrance, more commonly known as a due on sale clause is a provision within a mortgage that gives lenders the right to demand full satisfaction of a mortgage debt from a borrower.

If a mortgage agreement contains this provision, lenders can demand the satisfaction of the debt if the borrower obtains an additional encumbrance on the property such as an additional mortgage. Expressed in another way, a due on encumbrance mortgage provision accelerates the period in which the principal balance must be paid off.

Courts have the right to make due on encumbrance clauses unlawful if it is believed the clause places an undue burden on the property owner. Because property owners have the right to their equity, the legal system does not view such clauses favorably due to the fact that a due on encumbrance clause essentially forfeits the right of the borrower to obtain an additional loan on the property they own.

Why Lenders Have Due on Encumbrance Provisions

While the premise of due on encumbrance provisions are the subject of great debate, lenders claim to impose such provisions to protect their investments. The purpose of the provision is for lenders to have exclusive rights to the foreclosure in the event the borrower defaults. It also helps them know when the borrower will pay off the mortgage.

Due on encumbrance clauses restrict borrowers from transferring the property to another party. Clearly, this would make it difficult for borrowers to recoup the money owed to them if the lender had to chase another party.

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