Question

When a property is sold during a tight money market and the existing loan contains an alienation clause, which of the following is most likely to occur?

Selections

A. Buyer will assume the loan on existing terms

B. Seller would refinance the property before the sale

C. Buyer will take title “subject to” the loan

D. Buyer will secure new financing

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Answer: D

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5 Keys Summary

• An alienation clause (or due-on-sale clause) gives the lender the right to demand full payment of the outstanding loan balance immediately upon the transfer or sale of the property.

• Because the loan is subject to an alienation clause, the existing lender is likely to enforce it when the property is sold, preventing the buyer from assuming the existing (and likely lower-rate) loan.

• In a tight money market, lenders generally prefer to enforce alienation clauses to accelerate payment on older, potentially low-interest loans, allowing them to reinvest the capital in new loans at the current, higher market interest rates.

• The alienation clause also prevents the buyer from taking title “subject to” the existing loan, as this action still constitutes a transfer of the security property, triggering the lender’s right to accelerate the debt.

• Since the existing loan must be paid off due to the enforcement of the alienation clause, the buyer must obtain new financing to complete the purchase, even if new loans in a tight money market feature escalating interest rates and stricter terms.

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