What is a "due-on-sale" clause in a mortgage contract?

A "due-on-sale" clause in a mortgage contract is a provision that grants the lender the right to require the full repayment of the outstanding mortgage balance when the property is sold or transferred to a new owner. This clause is particularly important for lenders because it helps to protect their investment; in the event of a sale, they can ensure they receive the total amount owed rather than allowing the new owner to continue making payments under the existing terms, which could be more favorable than current market rates.

This type of clause is commonly included in mortgage agreements as a way to maintain control over who holds the loan and under what terms. When a property is sold, if the due-on-sale clause is triggered, the lender may require the seller to pay off the loan before the sale can proceed, thus mitigating any risk associated with having an unknown borrower continue making payments.

The other options do not accurately describe the purpose or function of a due-on-sale clause. Adjusting monthly payments, delaying foreclosure, or imposing late payment penalties involve different aspects of mortgage management and are not directly related to the sale of the property itself.