In most circumstances, a mortgage can’t be transferred from one borrower to another. That’s because most lenders and loan types don’t allow another borrower to take over payment of an existing mortgage.
In some cases, though, a mortgage transfer is necessary and permissible, such as in the event of a death, divorce or separation, or when a living trust is involved. Here’s what to know about transferring a mortgage, and what’s acceptable and what’s not.
What is a mortgage transfer?
A transfer of a mortgage is when a borrower re-assigns an existing home loan to another person or entity.
“In essence, this transfers all responsibilities associated with the mortgage and lien on the property to somebody new,” explains Rene Segura, head of consumer lending for FBX, the banking division of Informa Financial Intelligence, based in Dallas.
This transfer, or assignment, is usually only allowed when the mortgage is assumable, says Rajeh Saadeh, a Somerville, New Jersey-based real estate attorney. When transferring an assumable mortgage, the new borrower agrees to make all future payments at the original interest rate, and any legal obligations the original borrower has to the loan are typically severed.
Is my mortgage transferable?
To find out if your mortgage is transferable, assumable or assignable, it’s best to contact your lender and ask.
“Most lenders would prefer not to do a loan transfer, as it doesn’t benefit them in any way unless the buyer is at risk of being in default,” says Dustin Singer, a real estate agent with RE/MAX Citylife and an investor in Pittsburgh.
Make no mistake: Most mortgages are not transferable from one borrower to another. That’s true of conventional loans, which are not government-insured (meaning they’re not an FHA, VA or USDA loan), as well as conforming loans that meet funding criteria for Fannie Mae and Freddie Mac.
“These types of loans tend to use a due-on-sale clause, which requires a loan to be repaid in full or conveyance of the full interest in a property to allow the mortgage transfer,” says Segura. “In other words, the loan must be fully repaid, and a new mortgage would need to be executed to achieve a transfer.”
Loans that are usually assumable, meaning they can be transferred in some cases, include:
- FHA loans
- VA loans
- USDA loans
Of course, there are exceptions to this rule, so not all loans will be transferable.
“FHA loans are typically assumable but depend on the current state of the loan and the creditworthiness of the new borrower at the time of attempted transfer,” says Segura, adding that to complete the transfer, the new borrower would have to go through the application process and may need to have a property appraisal done, as well.
For VA loans, this same process applies, but only if the loan closed before March 1, 1988. VA loans closed after that date may require approval by the lender or loan servicer.
USDA loans may also be transferable pending lender approval.
Exceptions to the rule
Even if your mortgage has a due-on-sale clause and isn’t assumable, there are certain circumstances under which your lender may approve a transfer. These include:
- Death of a spouse, joint tenant or relative
- Transfers between family members, including the borrower’s spouse or children
- Divorce or separation agreements in which an ex-spouse continues to live in the home
- Living trust arrangements in which the borrower is a beneficiary
For these mortgage transfers to work, the new borrower needs to be added to the property’s deed, the deceased owner needs to be removed from the deed or a quitclaim deed must be signed by a spouse relinquishing ownership.
When a mortgage transfer makes sense
There are several scenarios in which a borrower may want to transfer their mortgage to another. The most common situations involve transferring to an immediate family member who has an ownership stake in the home, a family member who is better suited financially to take on the loan or to a relative or survivor after the death of the original borrower.
“Many people try to assume mortgages so they can take advantage of lower interest rates than what they would qualify for today,” adds Than Merrill, founder and CEO of FortuneBuilders in San Diego.
“All of these scenarios are still on a case-by-case basis in which the lender will need to approve the transfer,” says Segura.
Alternatives to a mortgage transfer
Instead of transferring a mortgage, there may be better options to pursue. Some options include:
Buying the home from the original borrower – the person who wishes to assume the loan will apply for a new mortgage and buy the home from the previous borrower. However, this means dealing with new loan terms and interest rates
Add a second borrower – this involves adding the new borrower to the loan. However, it won’t remove the original borrower so they’ll remain liable for the debt, making this a less than ideal solution.
Refinancing and adding a borrower – refinancing your mortgage and adding a second borrower lets you adjust the terms of the loan and its rate. It may be easier to add another borrower by refinancing. However, this also has the drawback of not freeing the original borrower from their liability for the loan.
Unofficial transfers – have the new borrower send payments to the original borrower, who then pays the loan. This is a bad idea because the initial borrower is liable for the debt and has little recourse if the new borrower stops paying. It may also break the terms of the mortgage, especially if the original borrower moves out.
Transferring a mortgage can simplify things: The new borrower wouldn’t have to apply for a new loan, pay for closing costs or possibly risk paying higher interest rates. However, many kinds of mortgages aren’t transferable, and if yours is, you’ll have to prepare for a lot of paperwork to make it official.
“The mortgage transfer will require a lot of documentation, with several new guidelines and criteria on the loan,” says Segura. “Read all documents thoroughly for any potential changes on the mortgage rights.”
Also, keep in mind that a mortgage transfer doesn’t change the debt obligation on the loan; the new borrower will still be required to pay off the same outstanding balance.
If in doubt, it’s best to discuss this option with a real estate attorney and skilled financial professional before proceeding.