Illinois Real Estate Practice Exam

What clause requires the mortgage to be paid in full if the property is sold?

1. Acceleration Clause

2. Alienation Clause

3. Equitable Title

4. Prepayment Penalty Clause

The correct answer is: Alienation Clause

The alienation clause, often referred to as a due-on-sale clause, is the provision within a mortgage agreement that stipulates the mortgage must be paid in full if the property is sold or transferred to another party. This clause protects the lender by ensuring that they have the right to demand immediate repayment of the loan balance if the property changes ownership. When a property is sold, the lender may prefer to avoid new buyers who might be less creditworthy than the original borrower, hence the need for this type of clause. By invoking the alienation clause, the lender can essentially uphold their investment by ensuring that the mortgage is cleared upon transfer of the property, rather than having to deal with a new borrower who takes on the existing mortgage without their approval. This clause helps maintain the lender's control over who is borrowing against their asset and ensures that they are still dealing with a borrower who meets their lending criteria. Thus, having an alienation clause is crucial for lenders to manage risk and protect their interests in the loan agreement.