A prepayment penalty is a fee for paying off all or part of your mortgage early. A due-on-sale clause is the part of your deed of trust that lets the lender demand full payment if you sell or transfer the home. They answer different questions. Most owner-occupied FHA, VA and conventional loans today have no prepayment penalty, and your Loan Estimate and Closing Disclosure must say whether yours does. Nearly every mortgage has a due-on-sale clause, but federal law stops lenders from using it for certain transfers, like a transfer to a spouse or to a relative after a borrower's death.
Federal disclosure rules define a prepayment penalty as a charge for paying all or part of the principal before it's due. Your Loan Estimate has a line in the Loan Terms table labeled "Prepayment Penalty" with a yes or no answer, and the Closing Disclosure repeats it (12 CFR 1026.37(b)(4)).
A few things are not prepayment penalties:
For FHA loans closed on or after Jan 21, 2015, the lender must accept a prepayment at any time and in any amount, can't require 30 days' notice, and must figure interest on the actual balance as of the day the payment is received, not through the end of the month (24 CFR 203.558). Older FHA loans have different rules on when the payoff can be applied.
VA borrowers have the right to prepay at any time, in full or in part, without a premium or fee, as long as a partial prepayment is at least one installment or $100, whichever is less (38 CFR 36.4311).
The federal ability-to-repay rule limits prepayment penalties on most home loans to consumers. A penalty is allowed only if state law permits it and the loan has a fixed or step rate that can't go up, is a qualified mortgage, and isn't a higher-priced mortgage loan. Even then, it can't apply after three years, it's capped at 2 percent of the amount prepaid in the first two years and 1 percent in the third, and the lender must also offer you a comparable option without a penalty (12 CFR 1026.43(g)). In practice, most conventional owner-occupied loans don't carry one, but always check the Loan Estimate.
Loans made primarily for business purposes, like many investor loans, generally aren't covered by those consumer rules, and prepayment penalties are common there. If you're looking at DSCR loans or other investor financing, the penalty structure is one of the first things to compare. Requirements vary by investor and loan structure.
A Texas home equity loan under Section 50(a)(6) of the Texas Constitution, which includes a cash-out refinance of your homestead, must be payable in advance without penalty or other charge (Tex. Const. art. XVI, sec. 50(a)(6)(G)). See how a Texas cash-out refinance works.
A due-on-sale clause lets the lender require the full balance if you sell or transfer an interest in the home without the lender's consent. It's about transfers, not about extra principal. It's why you generally can't hand a conventional loan to a buyer: the lender can call the loan, and a buyer who takes title "subject to" your loan without approval is taking that risk.
The Garn-St Germain Act lists transfers where a lender can't enforce a due-on-sale clause on a loan secured by a home with fewer than five units, including a manufactured home (12 U.S.C. 1701j-3(d)):
The federal regulation that carries out the law adds conditions for owner-occupied homes. For example, the relative, spouse and child exceptions apply when that person occupies or will occupy the home, and the trust exception expects the borrower to remain the occupant and keep the lender informed (12 CFR 191.5(b)). The protection is against the lender calling the loan. It doesn't by itself make the new owner a borrower or release the original borrower.
FHA and VA loans can be assumed by a qualified buyer with the lender's approval. VA's rules require the security instrument to say the loan isn't assumable without approval of VA or its authorized agent, and list the same kinds of exempt transfers (38 CFR 36.4309). See assuming a seller's mortgage.
These two clauses are often confused. A loan with no prepayment penalty can still have a due-on-sale clause, so you can pay it off early whenever you want, but you can't transfer it to a buyer without the lender. And an assumable FHA or VA loan still requires the buyer to qualify and get approval.
This example is made up to show how the two clauses work.
Renee has a conventional loan on her home in North Richland Hills. Her Closing Disclosure says "Prepayment Penalty: NO," so when she gets a bonus she sends extra principal and later pays the loan off in full when she sells, owing interest only through the payoff date. Her brother asks whether he could just take over her loan and payments instead of getting his own mortgage. That's a due-on-sale question, not a prepayment question, and a transfer to a sibling who isn't inheriting the home isn't on the federal exempt list, so the lender could call the loan. Separately, when Renee later adds her husband to the title after they marry, that transfer is one the lender can't use to call the loan, as long as the conditions in the rules are met.
Planning to pay off early, refinance, or move the home into a family member's name? I'll walk through what your loan terms allow and when you need a title company or attorney. Schedule a call, or when you're ready, start an application.
Links checked Oct 21, 2026.
About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.
Equal Housing Opportunity.
Last reviewed: Oct 2026