The problem begins simply enough. Soon moving to another city a homeowner negotiates and signs a contract for the sale of his present home. The contract provides that the purchasers are to assume the current mortgage with an interest rate of 91 %. The vendor and the purchasers notify the lender of the intended sale. Despite the fact that the proposed purchasers qualify as acceptable credit-risks, the lender informs the parties that the current mort- gage contains a "due-on-sale" clause and that he intends to accelerate the due date of the mortgage unless the purchasers agree to accept an increase in the interest rate from 9% to 15%. The purchasers, their enthusiasm now substantially chilled since this would result in a substantial increase in their monthly payments, inform the vendor that they are either unwilling or unable to close the deal. The vendor, fearing a repeat of this experience or at least a substantial wait to find a buyer wanting to refinance by a new mortgage, must either pay points to the lender to reduce the interest rate to his proposed purchaser or reduce the purchase price to make the deal attractive to the purchaser. Either way the vendor loses a substantial amount of the equity which he has built up in his home, equity which will be needed for the down payment on the home he intends to purchase in his new city. The purchasers also are faced with the problem that the home of their dreams may no longer be within financial reach.
W. W. Berryhill,
The Due-On-Sale Clause: A Marriage Gone Sour- A Checklist for the Practitioner,
U. Rich. L. Rev.
Available at: http://scholarship.richmond.edu/lawreview/vol16/iss1/6