What is the effect of a "Due-on-sale" clause in a mortgage?

A "Due-on-sale" clause in a mortgage enables the lender to demand full repayment of the loan when the property is sold or transferred. This means that if the homeowner decides to sell the property, the remaining mortgage balance becomes due immediately. The purpose of this clause is to protect the lender's interest, ensuring that they can reevaluate the mortgage terms and conditions—potentially including a new interest rate—if the property changes hands.

By requiring notification to the lender before transfer of property ownership, the clause ensures that the lender retains control over who assumes the mortgage obligation. This control helps the lender manage financial risk, as they may prefer to negotiate new terms with a buyer who meets their lending criteria rather than allowing the mortgage to be transferred to a potentially higher-risk borrower.

In this context, preventing the sale without lender approval directly correlates to protecting the lender's investment and rights under the terms of the loan. The other choices do not accurately describe the primary function of a "Due-on-sale" clause; they pertain to different aspects of mortgage agreements that don’t directly relate to the sale or transfer of property.