Hawaii Pre-Licensing National Practice Exam

In a conventional mortgage, what happens if the property is sold and the loan is assumed without the lender's approval?

1. The loan becomes due immediately

2. The loan terms change automatically

3. The seller's debt is forgiven

4. The buyer pays a higher interest rate

The correct answer is: The loan becomes due immediately

The scenario where a property is sold and the loan is assumed without the lender's approval typically triggers a due-on-sale clause, which is commonly included in conventional mortgages. This clause states that if the property is sold, the lender has the right to demand full repayment of the loan immediately. Lenders usually include this provision to ensure they can assess the creditworthiness of any new borrower and to maintain their ability to modify terms based on current market conditions. When a sale occurs without the lender’s consent, the original borrower remains liable for the mortgage debt, and the lender can enforce the clause to protect their financial interests. This means that the loan can be called due right after the transfer of ownership. Hence, the immediate delinquency of the loan occurs if the buyer assumes the loan without the necessary approval, reinforcing that the correct answer accurately reflects the consequences of such an action. The other options—changing loan terms automatically, forgiving the seller’s debt, or the buyer facing a higher interest rate—do not accurately represent the standard practices associated with conventional mortgages and what occurs in such instances, as they diverge from the established contractual obligations outlined in the loan agreement.