Question 43

Due-on-sale clauses are intended to prohibit the assumption of the mortgage.

A due-on-sale clause allows the lender to demand full repayment of the loan if the property is sold or transferred, thereby preventing the buyer from assuming the mortgage without the lender's consent.

A) subordination

Subordination clauses relate to the priority of claims against the property in the event of default and are not designed to prevent the assumption of the mortgage. They establish the order of payment among creditors but do not directly affect whether a mortgage can be assumed.

B) acceleration

Acceleration clauses enable the lender to demand the entire loan balance if the borrower defaults on the mortgage terms. While this clause increases the lender's rights upon default, it does not serve to restrict the assumption of the mortgage by a new owner.

C) amortization

Amortization refers to the gradual repayment of a loan through regular payments over time, which is unrelated to the assumption of a mortgage. This clause deals with how the loan is structured and repaid rather than who is responsible for the loan if the property changes hands.

D) due-on-sale

Due-on-sale clauses specifically prohibit the assumption of a mortgage by requiring that the full loan balance be paid if the property is sold or transferred. This clause protects the lender's interests by allowing them to evaluate any new buyer or potentially renegotiate terms.

Conclusion

The due-on-sale clause is specifically designed to prevent the assumption of a mortgage by demanding full repayment upon the sale of the property. In contrast, the other options—subordination, acceleration, and amortization—address different aspects of mortgage agreements and do not directly restrict the transfer of mortgage obligations to new owners. Therefore, option D is the only correct answer.