This specific clause stipulates that the total loan balance might be called due for payment upon change in any interest in the property to another person or persons. It is usually stated in this way or similarly: "If all or any area of the property herein is transferred without the lender's prior written permission, the lender may require all sums secured hereby immediately due and payable."
It should be mentioned that the clause, also known as the acceleration clause, is a contractual right and not a law. It is up to the lender’s discretion to need the whole balance to be paid. While inclusion of the clause isn't required by law, its enforcement is, actually, applied by federal law. If a property with a mortgage including the due on sale clause is transferred without the mortgage being completely paid back, the financial institution has the option to foreclose the house. On some instances, banks have been considered to be lenient in this way as long as the client continued with the payments. However, without having the “due on sale” provision, a brand new mortgage could secure an “assumable” loan.
There are cases where in the clause doesn't apply, such as when the transfer occurs in a property arrangement and the house simply goes to a partner, or when it happens by means of inheritance upon the death of the owner. Overall, owners are wont to abide by the clause as, besides foreclosure (which incidentally will reflect in the seller’s credit record), violation may lead to additional financial burden in the form of prepayment penalty, loss of investment and eviction, and so on.
For the time being, the risk of the bank calling in the loan is quite narrow. As long as the present loan is inside the vicinity of market interest rates, lenders are most likely not going to speed up the loan. Look out for an unexpected hike in rates, though, in which case, you can expect banks to be stricter in enforcing due on sale clauses again.
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