What is a Bona Fide Sale Clause?

A bona fide sale clause is a condition in some mortgage contracts that prevents borrowers from paying off or refinancing the mortgage early unless the property is sold to an unrelated third party. It restricts early repayment except in the case of a genuine property sale.

Why Bona Fide Sale Clauses Matter in Real Estate

Bona fide sale clauses matter in real estate because they limit borrower flexibility, ensuring lenders receive expected interest income for the mortgage term. Borrowers need to be aware of such clauses as they cannot refinance to access lower rates unless they sell the property.

Example of a Bona Fide Sale Clause in Action

A borrower discovers their mortgage includes a bona fide sale clause, meaning they cannot refinance at today’s lower rates without selling the home to an arm’s-length buyer.

Key Takeaways

• Restricts refinancing unless the property is sold.
• Protects lenders from lost interest income.
• Common in deeply discounted mortgage products.
• Reduces borrower flexibility to refinance.
• Important to review before signing a mortgage contract.

Related Terms

• Closed Mortgage
• Mortgage Penalty
• Prepayment Privilege
• Refinancing
• Arm’s-Length Transaction