What Is a Transfer of Mortgage?
Transfer of mortgage is a transaction where either the borrower or lender assigns an existing mortgage (a loan to purchase a property—usually a residential one—using the property as collateral) from the current holder to another person or entity.
Homeowners who are unable to keep current on their mortgage payments may seek a transfer so that they do not default and go into foreclosure. However, not every mortgage is transferable. Here's how a transfer of mortgage works, and how to tell if your mortgage allows this strategy.
key takeaways
- A transfer of mortgage is the reassignment of an existing mortgage from the current holder to another person or entity.
- Not all mortgages can be transferred to another person.
- If a mortgage can be transferred, the lender has the right to approve the person assuming the loan.
- Many mortgage lenders often include a due-on-sale clause in their loans that prohibits a home seller transferring a mortgage to a buyer.
How a Transfer of Mortgage Works
A transfer of mortgage lets a buyer take over the current homeowner's mortgage, assuming the same terms and conditions as they take over responsibility for payments. If your mortgage allows it, this strategy can help you avoid foreclosure, but it can have advantages for the new mortgage owner as well.
For one, the new mortgage owner may want to take on an older mortgage because such a transfer could let them take advantage of previous interest rates if they are lower than the current market rates. Although the new mortgage owner may have to undergo a credit check by the lender.
A transfer of the mortgage, if completed successfully without challenge or stipulations, would not change the terms or length of the loan. The new mortgage owner would only be responsible for the remaining outstanding balance. Through a transfer of the mortgage, a buyer might also avoid having to pay closing costs associated with a new mortgage.
Many mortgages are not eligible for transfer. Mortgages that are eligible are considered "assumable." In order to transfer a mortgage, the mortgage lender will typically need to verify that the person or entity that will assume the loan has adequate income and credit history to be able to make payments in a timely manner.
If you are not allowed to transfer a mortgage due to the loan's underwriting, you may need to explore other options to avoid foreclosure. For example, you could work with your lender to see if they will agree to other payment arrangements, such as a temporary suspension of your payment obligation.
Another option to avoid foreclosure is to sell the home and have a potential buyer, colleague, family member, or another entity agree to make up any difference between the home's sale price and the unpaid loan balance.
Special Considerations for Transfer of Mortgage
Lenders who want to deter a transfer of mortgage might include a clause in the mortgage that requires the remaining balance of the loan to be due on the sale of the property.
This due on sale clause ensures that when homeowners selltheir houses, they cannot transfer the mortgage to the buyer (which could play a key part in a homebuyer's making an offer, especially if the mortgage interest was lower than the current market rates). These clauses in effect require the seller to repay the full outstanding balance on the loan, perhaps with the sale proceeds, and likewise compel the buyer to take out a new mortgage to make the purchase.
Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even if ownership has changed.
You can potentially avoid triggering a due-on-sale clause by transferring the mortgage to an immediate family member, or to a spouse from whom one is legally separated or divorced.
Further, the transfer may be a result of an inheritance following the death of the borrower, and the family member is moving into the home. In such an instance, the lender might not have grounds to prevent the transfer of the mortgage. If the property is transferred to a living trust and the borrower is the trust’s beneficiary, the mortgage usually can also be transferred as well.
Can You Add a Co-Borrower to Your Mortgage?
Once you have a mortgage on your own, you cannot add a co-borrower without refinancing the loan. Many mortgage lenders allow co-borrowers, but some may not. The requirements for a home loan will vary by lender.
What Types of Mortgages are Assumable Mortgages?
Assumable mortgages that can be transferred to another person or entity may include Federal Housing Authority (FHA) loans, U.S. Department of Agriculture (USDA) loans, and Veterans Affairs (VA) loans. Conventional mortgages backed by Freddie Mac or Fannie Mae are generally not assumable.
What Is an Unofficial Transfer?
An unofficial transfer is not a legal arrangement. In this case, the original homeowner continues to make payments to their mortgage lender, but they receive payments from another party to help them make the payments.
The Bottom Line
Whether you can transfer a mortgage to another party will depend on what type of mortgage you have and the lender's standards. Most conventional mortgages backed by Fannie Mae and Freddie Mac are not eligible for mortgage transfers. Before you go forward with this strategy of avoiding foreclosure, consider alternatives such as working with your lender or requesting forbearance.
