In most circumstances, a mortgage can’t be transferred from one borrower to another. That’s since most lenders and loan types don’t allow another borrower to take over payment of the existing mortgage.
In some cases, though, a mortgage transfer is essential and permissible, for example in case of a death, divorce or separation, or when a living trust is involved. Here’s what to know about transferring a home loan, and what’s acceptable and what’s not.
What is really a mortgage transfer?
A change in a home loan happens 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 a new person,” explains Rene Segura, head of consumer lending for FBX, the banking division of Informa Financial Intelligence, located in Dallas.
This transfer, or assignment, is usually only allowed once the mortgage is assumable, says Rajeh Saadeh, a Somerville, New Jersey-based property attorney. When transferring an assumable mortgage, the brand new borrower agrees to make all future payments at the original interest rate, and any legal obligations the original borrower needs to the borrowed funds are usually severed.
Is my mortgage transferable?
To determine whether your mortgage is transferable, assumable or assignable, it’s best to speak to your lender and get.
“Most lenders would prefer not to do financing transfer, because it doesn’t benefit them by any means unless the buyer reaches chance of finding yourself in default,” says Dustin Singer, a real estate agent with RE/MAX Citylife and an investor in Pittsburgh.
Make no mistake: Most mortgages aren't transferable in one borrower to a different. That’s true of conventional loans, which aren't government-insured (meaning they’re not an FHA, VA or USDA loan), in addition to conforming loans that meet funding criteria for Fannie Mae and Freddie Mac.
“These kinds of loans have a tendency to use a due-on-sale clause, which requires a loan to be repaid entirely or conveyance from the full interest in a house to allow the mortgage transfer,” says Segura. “In other words, the borrowed funds 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 present 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 need to go through the application and may call for a property appraisal done, too.
For VA loans, this same process applies, but only if the borrowed funds closed before March 1, 1988. VA loans closed next date may require approval by the lender or loan servicer.
USDA loans may also be transferable pending lender approval.
Exceptions to the rule
Even in case your mortgage has a due-on-sale clause and isn’t assumable, there are specific circumstances under which your lender may approve a transfer. Included in this are:
- Death of a spouse, joint tenant or relative
- Transfers between family members, including the borrower’s spouse or children
- Divorce or separation agreements by which an ex-spouse is constantly on the live in the home
- Living trust arrangements in which the borrower is a beneficiary
For these mortgage gets in work, the new borrower must be put into the property’s deed, the deceased owner must be taken off 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 typical situations involve transferring to an immediate family member that has an ownership stake in the home, a family member who's better suited financially to defend myself against the loan in order to a family member or survivor following the death from the original borrower.
“Lots of people attempt to assume mortgages to allow them to make the most of lower rates of interest than they would be eligible for a today,” adds Than Merrill, founder and CEO of FortuneBuilders in San Diego.
“Many of these scenarios continue to be on a case-by-case basis in which the lender will need to approve the transfer,” says Segura.
Alternatives to some 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 obtain a new mortgage and buy the home in the previous borrower. However, this means coping with new loan terms and interest rates
Add a second borrower – this requires adding the new borrower to the loan. However, it won’t take away the original borrower so they’ll remain liable for the debt, causeing this to be a less than ideal solution.
Refinancing and adding a borrower – refinancing your mortgage and adding another borrower lets you adjust the terms of the loan and its rate. It might be easier to add another borrower by refinancing. However, this has got the drawback of not freeing the initial borrower using their liability for the loan.
Unofficial transfers – have the new borrower send payments towards the original borrower, who then pays the borrowed funds. This can be a bad idea since the initial borrower is likely for the debt and it has little recourse if the new borrower stops paying. It may also break the the mortgage, especially if the original borrower moves out.
Transferring a mortgage can simplify things: The brand new borrower wouldn’t need to apply for a new loan, pay for settlement costs or possibly risk paying higher rates of interest. However, many different types of mortgages aren’t transferable, and when yours is, you’ll have to get ready for lots of paperwork to really make it official.
“The mortgage transfer will need a lot of documentation, with several new guidelines and criteria on the loan,” says Segura. “Read all documents thoroughly for just about any potential changes on the mortgage rights.”
Also, remember that a home loan transfer doesn’t change the debt obligation around the loan; the new borrower will still be required to remove the same outstanding balance.
If doubtful, it’s best to discuss this option with a real estate attorney and skilled financial professional before proceeding.
ON THIS PAGE
- What is a mortgage transfer?
- Is my mortgage transferable?
- When a mortgage transfer is sensible
- Options to a home loan transfer