What Is Alienation in Real Estate Contracts?

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

When my family decided to move from our home in the city to a rural area, we had a lot of things to consider. One of the biggest decisions was whether or not to include an alienation clause in our real estate contract. What is alienation in real estate?

Many mortgages have an alienation clause which essentially gives the lender the right to call the note due if the borrower tries to sell or transfer the property.

There seems to be a lot of confusion about this term so we’ll break down bit by bit what is alienation in real estate.

What Is Alienation in Real Estate?

Alienation is a provision in mortgage contracts that prevents you from selling your house and passing the mortgage on to the new owner.

Your buyer will need to find their own source of funding before finalizing your home purchase.

If you’re selling a home with an alienation clause, you should understand what it means financially once you receive an acceptable offer.

Carefully reading your contract is vital because it determines how you will exit your contract with your mortgage lender when you sell your property.

The alienation clause is often found in both residential and commercial real estate contracts.

What is The Purpose of an Alienation Clause?

An alienation clause in a mortgage means that the owner cannot assign or sell the property to another party. This applies to the entire life of the loan.

While you can sell your house before you pay it off, your contract requires that you sell it and use the proceeds to pay off the mortgage.

The terms of the loan you have with your lender have absolutely nothing to do with your buyer’s ability to get a similar type of financing. If buyers aren’t paying with cash, they must get loans from lenders, who will determine the interest rate and repayment terms that are appropriate for their financial situation.

How Alienation Clauses Work

Remember that lenders have the right to enforce an alienation agreement, but they don’t have to do so.

There are situations where a lender can’t enforce an alienation agreement such as when a homeowner passes away. The surviving spouse can inherit the property when the other spouse has passed.

If you are the second owner of a joint account, you might be able to take over the current mortgage without immediately having to repay it right away. The same rules apply when a title is transferred through a will.

However, the beneficiary who inherits the house must live in the house.

If a borrower has other loans, then they cannot be forced to repay the loan. The first mortgagee can’t demand immediate payment.

Lenders can only use an alienation clause when there are no heirs or liens on the property.

What an Alienation Clause Means for Home Sellers

If you are selling a home with a mortgage, your contract of sale will include a clause that states that you must pay off the entire amount of your mortgage at the time of closing. This is known as the due-on-sale stipulation.

Here’s what you need to pay by the time of the home sale:

  • The remaining loan balance.
  • All accrued interest since the enforcement of the clause.

You don’t have to pay any future interest that would have accrued if the loan continued.

However, you should still adhere to the language in your mortgage loan agreement, which specifies when and how you are required to pay down your outstanding loan.

Since mortgage loans are attached to both people and property, homeowners can’t just transfer their loans when they move to a new house.

During the mortgage application process, a lender will look at your credit history and score. Lenders will, however, assess the risk of the property as well by evaluating your appraisals and inspections.

The mortgage process is very complex, and there are so many factors that can change from location to location and from person to person.

While lenders can enforce an alienation clause, they sometimes choose not to. There are several reasons why they might do this.

The law prohibits lenders from enforcing alienation clauses under the following circumstances.

  • A surviving joint tenant takes over the property title after the mortgage holder’s death.
  • The beneficiary of a title inheritance moves into the home.
  • The former spouse or child moves into the home after a divorce.
  • The property title is transferred to a living trust.
  • A home equity loan or mortgage is taken out on a property.

Some older loans, especially ones from the 1970s and 1980s, may not include an alienation clause.

Just because the norms of society change, it doesn’t mean that lenders are allowed to retroactively make changes to your mortgage. This would be a clear violation of the original contract terms.

What is an Acceleration Clause?

While an alienation agreement is initiated when you sell your property, an acceleration clause takes effect when you miss a repayment on your mortgage.

Both clauses require that you repay the entire balance of the loan with accumulated interest in one lump sum.

An acceleration clause in your loan agreement means that the lender can demand full payment of the loan if you breach any conditions of the contract. This could happen if you fall behind on just one payment.

While each mortgage company may have different policies, here are the most common situations that can trigger an acceleration clause:

  • You conduct an authorized property transfer.
  • Your homeowner’s insurance expires.
  • You miss mortgage payments.
  • You miss property tax payments.
  • You file for bankruptcy.

If you are unable to come up with the money to pay off the remainder of your mortgage loan once your accelerated mortgage kicks in, then your bank will likely move forward with the foreclosure process.

If you can catch up on your missed payments, you can probably negotiate to avoid a foreclosure.

What is an Assumable Mortgage?

An assumable mortgage is the exact opposite of an alienation clause. Here’s what that means:

  • The buyer assumes all of the terms of an existing loan.
  • The buyer starts paying for the mortgage.
  • The seller is free from any obligation or liability on the loan.

The biggest benefit to buyers who can’t qualify for a loan is that they step into a mortgage with a lower rate, based on the credit of the seller, rather than their own.

While certain government-backed loans, such as FHA loans, are assumable, this is extremely rare for a conventional loan. In fact, most lenders don’t even allow their borrowers to transfer their loans to a new buyer.

A mortgage may be assumed by a new borrower if the original lender approves of the transfer. This assumes that the borrower meets the required credit and income criteria.

Unfortunately, you won’t be able to know for certain if your mortgage can be assumed until your bank looks at your potential buyers’ credit scores.

Conclusion

If you find an alienation clause in your real estate contract, it’s best to know what is alienation in real estate and how it works. While this clause can provide some protection for buyers, there are also potential downsides that should be considered. Ultimately, whether or not to execute an alienation clause is a decision that depends on the lender and your unique situation.

Justin McGill