Question 72

A clause preventing a subsequent buyer from assuming the mortgage is called a due-on-sale clause.

A due-on-sale clause is a provision in a mortgage that gives the lender the right to demand full repayment of the loan if the property is sold or transferred, thereby preventing a subsequent buyer from assuming the mortgage.

A) condemnation clause

A condemnation clause relates to the situation where a property is taken by the government under eminent domain. This clause does not prevent a buyer from assuming the mortgage; rather, it addresses compensation in the event of property seizure, making it unrelated to the question.

B) defeasance clause

A defeasance clause allows a borrower to end their obligation under a mortgage by fulfilling certain conditions, typically involving payments or the substitution of collateral. This clause does not prevent assumption of the mortgage by a buyer; hence, it is not the correct answer.

C) due-on-sale clause

The due-on-sale clause specifically stipulates that if the property is sold or otherwise transferred, the lender can demand full repayment of the remaining loan balance. This effectively prevents the buyer from assuming the existing mortgage, making it the correct answer.

D) right of first refusal

A right of first refusal gives a party the opportunity to purchase a property before the owner can sell it to another buyer. This clause does not pertain to the assumption of a mortgage and is therefore irrelevant to the question.

Conclusion

The due-on-sale clause is definitive in preventing subsequent buyers from assuming the mortgage, distinguishing it clearly from the other options provided. Each of the incorrect options addresses different legal or transactional aspects that do not relate to the assumption of a mortgage, reinforcing the correctness of the due-on-sale clause in this context.