PSI New Jersey Real Estate State Practice Exam

What clause in a mortgage loan allows a lender to demand immediate repayment if the property is sold?

1. Subordination clause

2. Alienation clause

3. Acceleration clause

4. Due-on-sale clause

The correct answer is: Alienation clause

The due-on-sale clause is a standard provision in mortgage agreements that allows lenders to demand full repayment of the loan if the property is sold or transferred to a new owner. This clause serves as a protective measure for lenders, ensuring that they can reassess the risk associated with their loan whenever the property changes hands. When a property is sold, the lender may not want the new owner to take over the loan terms, especially if the market conditions or borrower profiles have changed significantly since the loan was originally issued. While the alienation clause and the due-on-sale clause are often used interchangeably, the term "due-on-sale clause" is more specific in its application to the sale or transfer, making it the correct choice in this context. The subordination clause pertains to the priority of liens or claims against the property and does not directly relate to the repayment upon sale. The acceleration clause, on the other hand, allows lenders to demand full payment of the remaining balance in situations of default or other specified conditions, but it is not specifically triggered by the sale of the property. Thus, the specificity of the due-on-sale clause in relation to transactions involving the property makes it the correct answer.