What is an Alienation Clause?
Included in most home mortgages is a section that is referred to as an alienation clause. Essentially, the alienation clause is an agreement that if the incumbent owner should ever choose to sell the property, the holder of the mortgage will be able to call for a full settlement of the outstanding amount due. Sometimes referred to as a due on sale clause, the purpose of the alienation clause is to ensure that the mortgage holder is not left with no payments and no collateral to claim in the case of a default on the mortgage. In practice, the alienation clause is usually invoked when the ownership of property is transferred from the owner of record to another individual. Often, this is often accomplished by the mortgage company simply opening an account for the new owner, extending a mortgage under the new account, and using a portion of the funds to pay off the previous mortgage on the same property. While this may mean for a very short time, there are two existing mortgages under two
An Alienation Clause is the language in a mortgage or trust deed that allows the lender to call the loan immediately due and payable in the event the owner sells the property or transfers title to the property. Almost every loan today contains an alienation clause, which means title cannot transfer and a buyer cannot purchase subject to an existing loan without triggering a due on sale clause.
Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should a purchaser or borrower sell his or her interest to another party, the new party must negotiate a new contract with the issuer or lender. In this way, the term “alienation” is synonymous with “transfer”. In the case of insurance contracts, if a property owner sells his or her property, an alienation clause would cause the existing homeowner’s insurance to become null and void, which would force the new owner to purchase a new, unique policy. Alternatively, when an alienation clause is inserted into a loan agreement, transfer of a mortgaged asset requires that asset to be refinanced under a new agreement following a change of ownership. For real estate transactions, alienation clauses are a prime factor in the decline of assumable mortgages. To keep reading about insurance issues, check out our Insurance 101 feature. This question was answered by Justin Bynum.
