Understanding Due on Sale Insurance

Due on sale insurance is a type of policy that is designed to protect the lender’s interests when the borrower transfers ownership of the property. The policy is often required when a borrower sells the property or transfers ownership to a family member, business partner, or related entity. The insurance protects the lender against losses that may occur if the new owner defaults on the loan or if the property is damaged or destroyed. In this article, we will explore due on sale insurance in detail and answer some frequently asked questions about this important policy.

What is Due on Sale Insurance?

Due on sale insurance is a type of coverage that is designed to protect the lender’s interests when the borrower sells the property or transfers ownership to a related party. The policy ensures that the lender is protected against any losses that may occur as a result of the change in ownership. This type of insurance is often required by lenders when a borrower transfers ownership of the property to another party.

Due on sale insurance is often included as a provision in a mortgage contract. This clause requires the borrower to purchase the insurance and provide proof of coverage to the lender. The policy typically covers the outstanding balance of the loan plus any accrued interest, fees, and expenses.

How Does Due on Sale Insurance Work?

When the borrower sells or transfers ownership of the property, the lender may require that the new owner assume the existing mortgage. The new owner will be responsible for making all future payments on the loan. If the new owner defaults on the mortgage, the lender may foreclose on the property and seek to recover its losses.

Due on sale insurance protects the lender against losses that may occur if the new owner defaults on the loan or if the property is damaged or destroyed. The policy typically covers the outstanding balance of the loan plus any accrued interest, fees, and expenses. If the new owner defaults on the mortgage, the lender can file a claim with the insurance company to recover its losses.

Why is Due on Sale Insurance Important?

Due on sale insurance is important because it protects the lender’s interests when the borrower sells or transfers ownership of the property. Without this type of policy, the lender may be exposed to significant losses if the new owner defaults on the loan or if the property is damaged or destroyed.

Due on sale insurance is also important for borrowers because it may be a requirement for transferring ownership of the property. If the borrower fails to purchase the insurance, the lender may not approve the transfer of ownership, which could prevent the borrower from completing the sale or transfer.

What Does Due on Sale Insurance Cover?

Due on sale insurance typically covers the outstanding balance of the loan plus any accrued interest, fees, and expenses. The policy may also cover any damages or losses that occur as a result of the change in ownership, such as damage to the property or loss of income due to a lease or rental agreement.

Depending on the terms of the policy, due on sale insurance may also cover legal fees and other expenses associated with defending against a claim or lawsuit related to the property or the loan. It is important to carefully review the policy terms and conditions to understand what is covered and what is not.

How Much Does Due on Sale Insurance Cost?

The cost of due on sale insurance can vary depending on a number of factors, including the value of the property, the outstanding balance of the loan, and the coverage provided by the policy. Generally, due on sale insurance is priced as a percentage of the loan amount, with rates ranging from 0.5% to 2% of the loan amount.

For example, if the outstanding balance of the loan is $100,000 and the policy rate is 1%, the cost of the due on sale insurance would be $1,000. It is important to shop around and compare rates from different insurers to find the best coverage at the most affordable price.

FAQ

What is the difference between due on sale insurance and title insurance?

Due on sale insurance and title insurance are two different types of coverage that protect lenders and borrowers in different ways. Due on sale insurance is designed to protect the lender’s interests when the borrower transfers ownership of the property. Title insurance, on the other hand, is designed to protect the borrower and the lender against losses that may occur due to defects in the title or ownership of the property.

Is due on sale insurance required by law?

Due on sale insurance is not required by law, but it may be required by the lender as a condition of the loan. If a borrower wishes to sell or transfer ownership of the property, the lender may require that due on sale insurance be obtained to protect its interests.

Can I shop around for due on sale insurance?

Yes, borrowers can shop around for due on sale insurance just like any other type of insurance. It is important to compare rates and coverage options from multiple insurers to find the best coverage at the most affordable price.

Is due on sale insurance tax deductible?

The tax deductibility of due on sale insurance may vary depending on the specific circumstances of the loan and the borrower. Generally, the cost of the insurance may be deductible as a business expense if the property is used in a trade or business. However, borrowers should consult with a tax professional for guidance on their specific situation.

What happens if I don’t purchase due on sale insurance?

If the lender requires due on sale insurance and the borrower fails to purchase the policy, the lender may not approve the sale or transfer of the property. This could prevent the borrower from completing the transaction. Additionally, if the new owner defaults on the loan or if the property is damaged or destroyed, the lender may seek to recover its losses from the borrower.

Conclusion

Due on sale insurance is an important policy that protects the lender’s interests when the borrower sells or transfers ownership of the property. The policy ensures that the lender is protected against any losses that may occur as a result of the change in ownership. It is important for borrowers to understand the requirements for due on sale insurance and to shop around for the best coverage at the most affordable price.