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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 allowed, such as in the event of a death, divorce or separation, or when a living trust is involved.
What is a mortgage transfer?
A transfer of a mortgage is when a borrower reassigns 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,” says 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. The transfer typically severs any legal obligations the original borrower has to the loan.
Is my mortgage transferable?
To find out if your mortgage is transferable, assumable or assignable, 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 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 you can transfer them in some cases, include:
- FHA loans
- VA loans
- USDA loans
Keep in mind 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 spouse relinquishing ownership must sign a quitclaim deed.
When a mortgage transfer makes sense
Common situations for transferring a mortgage 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.
“All of these scenarios are still on a case-by-case basis in which the lender will need to approve the transfer,” says Segura.
“Many people try to assume mortgages so they can take advantage of lower interest rates than what they would qualify for today,” says Than Merrill, founder of FortuneBuilders in San Diego.
How to transfer a mortgage
If your mortgage qualifies for a transfer, here’s how the process might look:
- Contact your lender. Before doing anything else, reach out to your lender to check that your mortgage is transferable.
- Consider legal representation. Transferring a mortgage can be complicated. If you’re nervous about doing it alone, you can hire an attorney to help you navigate the process.
- Begin the transfer process. After confirming your eligibility, you can work with your lender to start the transfer. Depending on your loan and lender, this can include completing paperwork and verifying that you’re current on your payments. The lender will also assess the new borrower’s credit profile.
- Complete the transfer. Mortgage transfers aren’t instant. Until yours is approved, don’t forget to keep making loan payments and comply with any follow-up instructions sent by your lender.
What are transfer taxes?
Some state and local governments impose a one-time real estate transfer tax that must be paid any time a property is transferred from one person to another. In many cases, the seller must cover transfer taxes, but this varies by jurisdiction. The amount of the tax also depends on where you live, but it’s usually either a flat rate or a percentage of your home’s sale price.
Alternatives to a mortgage transfer
Instead of transferring a mortgage, consider these alternatives:
- Buying the home from the original borrower: The person who wishes to assume the loan applies for a new mortgage and buys the home from the previous borrower. However, this means dealing with new loan terms and interest rates.
- Adding a second borrower: This option involves adding the new borrower to the loan. However, it won’t remove the original borrower, so they’ll remain liable for the debt.
- Refinancing and adding a borrower: Refinancing your mortgage and adding a second borrower lets you adjust the loan’s terms and 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: With this option, you can have the new borrower send payments to the original borrower, who then pays the loan. However, 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.
While most mortgages aren’t transferable, some lenders might make an exception for transfers between parents and children. You’ll need to speak with your lender to see if you’re eligible and understand the requirements.
For an official transfer, you’ll need to work with your lender to initiate and complete the process. There are also unofficial transfers, where the original borrower continues paying the loan using funds from the new borrower (and neither party notifies the lender). This isn’t recommended because it has legal and financial risks.
A bank might transfer a mortgage for several reasons, including death and divorce. Living trust arrangements can also trigger a mortgage transfer.
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 still needs to pay off the same outstanding balance.
If in doubt, consider discussing this option with a real estate attorney and skilled financial professional before proceeding.