Hawaii Pre-Licensing National Practice Exam

Which clause in a mortgage allows the lender to accelerate repayment when the loan is assumed?

1. Due-on-sale clause

2. Default clause

3. Prepayment penalty clause

4. Subordination clause

The correct answer is: Due-on-sale clause

The due-on-sale clause is essential in a mortgage agreement because it specifies that if the borrower sells the property or transfers ownership, the lender has the right to demand full repayment of the outstanding loan balance. This clause serves to protect the lender from the risk of having a borrower who may not meet the original creditworthiness criteria taking over the loan if the loan is assumed by a new buyer. When a mortgage is assumed, the new borrower may have different financial circumstances than the original borrower, which could affect their ability to repay the loan. By including a due-on-sale clause, lenders ensure they can accelerate the loan repayment if the property changes hands, thereby safeguarding their investment and maintaining control over who is responsible for the debt. The other clauses mentioned do not serve this specific purpose: the default clause deals with situations where the borrower fails to meet repayment terms, the prepayment penalty clause imposes a fee for paying off the loan early, and the subordination clause relates to the priority of claims in case of default, rather than addressing assumptions of the mortgage.