Transferring A Mortgage: How It Works

Most loans don’t allow another borrower to take over payment of an existing mortgage, but the lender may allow a mortgage transfer in certain situations — such as a death, divorce or separation, or when a living trust is involved.

Government-backed loans do allow transfers in some cases, but the process isn’t simple. Read on to learn about how mortgage transfers work, who can do it and the alternatives you may have with your home loan.

What is a mortgage transfer?

A transfer of a mortgage is the process of reassigning an existing home loan to another person or entity. The new borrower agrees to make all future payments at the original interest rate. The transfer typically eliminates any legal obligations the original borrower has to the loan.

How transferring a mortgage works

When you transfer a mortgage, another person takes on the financial responsibility of repaying the outstanding loan balance, under the same terms and conditions. The monthly payment, loan length and interest rate will remain the same once the mortgage is transferred to the new borrower.

Transferring a mortgage has benefits for both the original borrower and the new borrower. For example, transferring a mortgage can help the original borrower avoid foreclosure if they’re unable to continue paying their loan. For the new borrower, taking over an existing mortgage can potentially help them get a better interest rate than what’s offered in the current market and side-step the closing costs required with a new mortgage.

Can I transfer my mortgage to another person?

Probably not. Most mortgages are not transferable from one borrower to another. That’s true of conventional loans, which are not government-backed (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,” says Rene Segura Knosel, head of consumer lending at Informa Financial Intelligence, based in Dallas. “The loan must be fully repaid, and a new mortgage would need to be executed, to achieve a transfer.”

“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.

On the other hand, government-backed loans, including VA loans, are usually assumable, meaning you can transfer them in some cases.

Keep in mind that even if your loan is assumable, your lender may not approve your transfer. For example, Segura Knosel points out that the transfer of an FHA loan depends on the state of the loan and the new borrower’s credit. He says a property appraisal may be required, too.

When you may be able to transfer a conventional loan

Even if your mortgage has a due-on-sale clause and isn’t assumable, there are certain circumstances under which it’s worth asking your lender about a transfer. These include:

For these mortgage transfers to work, the new borrower must be added to the property’s deed. In the event of a death or a divorce, the deceased owner needs to be removed from the deed, or the spouse relinquishing ownership must sign a quitclaim deed.

When a mortgage transfer makes sense

Right now, the biggest perk of a mortgage transfer is the potential to score a rate that isn’t available in today’s lending environment. For example, if the current owner of a home has a 3 percent mortgage rate, transferring the loan means that the new owner will get a significant savings over the current market.

Transferring a mortgage might also make sense if:

• A family member has an ownership stake in the home: If an immediate family member has an ownership stake in the property, you might transfer the mortgage into their name.
• A family member is better suited financially to take on the loan: Transferring a mortgage can be a good solution if you have a family member who is in a better financial position to repay the loan.
• The original borrower has passed away: If the original mortgage borrower dies, it makes sense to transfer the loan to a relative or survivor who has the ability to pay it back.

Remember that the ability to transfer isn’t a guarantee.

“All of these scenarios are still on a case-by-case basis in which the lender will need to approve the transfer,” says Segura Knosel.

How to transfer ownership of a house with a mortgage

If your mortgage qualifies for a transfer, here’s how the process might look:

1. Contact your lender. Before doing anything else, reach out to your lender to check that your mortgage is transferable.
2. Consider legal representation. Transferring a mortgage can be complicated. If you’re nervous about doing it alone, you can hire an attorney.
3. File your paperwork. Depending on your loan and lender, this can include verifying that you’re current on your payments. The lender will also assess the new borrower’s credit.
4. Stay current on your loan. 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.
5. Pay the taxes: Most 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.

Be ready for a lot of paperwork.

“The mortgage transfer will require a lot of documentation,” says Segura Knosel. “Read all documents thoroughly for any potential changes on the mortgage rights.”

Alternatives to a mortgage transfer

If the process seems too daunting – or if your loan isn’t eligible – 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 another party 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 other party stops paying. It may also break the terms of the mortgage, especially if the original borrower moves out.

FAQ

• Can I take over a mortgage from my parents?
  

  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.

• Do I have to notify my lender of the transfer?
  

  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 party (and neither party notifies the lender). This isn’t recommended because it has legal and financial risks.

• Why would a bank transfer a mortgage?
  

  A bank might transfer a mortgage for several reasons, including death and divorce. Living trust arrangements can also trigger a mortgage transfer.