Tennessee Realtor State Practice Exam

Under what circumstance is a property transfer not subject to an alienation clause according to federal law?

1. Upon property sale to a third party

2. If the borrower refinances

3. When a borrower dies and a relative inherits

4. During commercial property transfers

The correct answer is: When a borrower dies and a relative inherits

The correct answer centers on the specific situation outlined by federal law regarding property transfers and alienation clauses. An alienation clause is a provision in a mortgage that allows the lender to require the full loan balance to be paid if the property is sold or transferred. This clause is designed to protect the lender's interests, allowing them to assess risk associated with the new owner. In the case of inheritance, such as when a borrower dies and a relative inherits the property, federal law provides certain protections. Generally, the transfer of property through inheritance does not trigger the alienation clause because the ownership is not technically being sold or otherwise transferred in a manner that involves a new buyer. Instead, the heir takes over the property under conditions that do not constitute a new sale, preserving the existing mortgage terms and obligations. Therefore, this transfer is exempt from the alienation clause. In contrast, other options such as selling to a third party and refinancing typically engage the alienation clause, requiring the borrower to satisfy the terms of the mortgage, as these situations involve a change in ownership or restructuring of the loan. Additionally, commercial property transfers often include their own set of rules and can also fall under alienation clauses. Thus, the unique circumstance of inheritance makes it a significant exception