Definition
A due-on-sale clause requires full loan repayment when the property is sold or ownership transfers. It prevents assumption of below-market mortgages. Most mortgages include this, though FHA and VA loans are often assumable. Violating it can trigger acceleration and foreclosure.
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Due-on-sale clauses allow lenders to demand full payoff when property ownership changes. This protects lenders by preventing assumption of old mortgages with below-market rates and allowing them to re-underwrite new borrowers. Due-on-sale clauses are included in nearly all mortgages. However, some loans (particularly FHA and VA loans) allow assumption to qualified buyers. Violating due-on-sale clauses (selling without payoff) can result in lender acceleration and foreclosure, though lenders don't always enforce immediately.
Pro Tip
When selling a home, the sale proceeds pay off any due-on-sale mortgages; this is standard practice and doesn't require special action.
Example
Your home has a mortgage with a due-on-sale clause at 3.5% when market rates are 6.5%. If you sell, the buyer cannot assume your low-rate mortgage; the loan must be paid off and the buyer must obtain new financing.