Can a Mortgage Be Transferred to Another Person?

Transferring a mortgage involves reassigning an existing home loan from the current borrower to another individual. This means the new party would take on the responsibility for repaying the loan under its original terms, including the interest rate and remaining loan duration. While the concept of transferring a mortgage might seem straightforward, it is generally not a simple process. Most mortgage agreements are not designed for easy transferability, presenting specific conditions and requirements that must be met. However, certain circumstances and loan types do allow for such a transfer, offering potential benefits for both the original borrower and the new party.

The Default Rule: Due-on-Sale Clauses

Most modern mortgage contracts contain a provision known as a “due-on-sale” clause, which restricts the transfer of a mortgage. This clause stipulates that if the mortgaged property is sold or otherwise transferred without the lender’s prior written consent, the lender has the right to demand immediate and full repayment of the entire outstanding loan balance. The purpose of a due-on-sale clause is to protect the lender’s financial interests. It allows lenders to prevent a new, potentially less creditworthy, borrower from assuming an existing loan, thereby reducing default risk.

The clause also enables lenders to adjust interest rates to current market conditions when a property changes hands. If a mortgage with a lower interest rate from a previous market environment were freely transferable, lenders could lose out on potential revenue from new loans issued at higher prevailing rates. This clause is standard in conventional mortgage agreements and acts as a barrier to transferring a mortgage obligation from one person to another. It ensures original loan terms, including the interest rate, remain tied to the initial borrower unless approved by the lender.

Scenarios Allowing Mortgage Transfer

Despite the prevalence of due-on-sale clauses, circumstances permit a mortgage transfer. These scenarios fall into two categories: assumable mortgages and legally exempt transfers. Assumable mortgages are loan types that, by their nature or terms, can be taken over by a new borrower, subject to lender approval. Loans backed by government agencies, such as Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans, are often assumable. For these loans, a new buyer can take over the existing mortgage with its original interest rate and terms, which can be advantageous in a rising interest rate environment.

The buyer needs to qualify with the lender by meeting credit and income requirements similar to obtaining a new mortgage. Certain transfers are legally exempt from the due-on-sale clause, meaning the lender cannot accelerate the loan even if the property changes ownership. The Garn-St. Germain Depository Institutions Act of 1982 provides exemptions. For instance, a transfer to a spouse or child upon the death of the borrower, or a transfer to a joint tenant upon the death of another joint tenant, does not trigger the due-on-sale clause.

Transfers resulting from a divorce decree, legal separation agreement, or property settlement agreement are also exempt. Another exemption includes transfers into an inter vivos trust (a living trust) where the borrower remains a beneficiary of the trust and continues to occupy the property. These exemptions protect homeowners in common life events, allowing property to pass to family members or into a trust without forcing immediate mortgage repayment.

The Mortgage Assumption Process

When a mortgage is assumable, the process for a new borrower to take over the loan involves several steps. The initial step is to determine if the existing mortgage is assumable, which can be confirmed by contacting the current mortgage servicer or lender. This inquiry will clarify the requirements and conditions for assumption. Once assumability is verified, the prospective new borrower must undergo a qualification process with the lender.

This qualification mirrors the criteria for obtaining a new mortgage, including a review of the applicant’s credit history, current income, and debt-to-income ratio. The lender will assess the new borrower’s financial capacity to ensure they can meet the ongoing mortgage payments. During this phase, the new borrower will submit an application along with financial documents like pay stubs, W-2 forms, tax returns, and bank statements. Assumption fees, typically 0.5% to 1% of the loan amount, are paid during this process and are part of closing costs.

An aspect for the original borrower in a mortgage assumption is obtaining a formal “release of liability” from the lender. If granted, this release frees the original borrower from any future responsibility for the loan. Without this release, the original borrower remains secondarily liable for the debt, meaning they are responsible if the new borrower defaults. The final stage is the signing of new loan documents, such as an assumption agreement, which formally transfers the mortgage obligation to the new borrower.

Liability When Property Title Transfers Without Mortgage

Transferring a property’s title, such as through a quitclaim deed, does not transfer the mortgage obligation. The deed is a document that conveys ownership of the property, but it is distinct from the promissory note, which is the borrower’s promise to repay the loan to the lender. If a property is transferred without a formal mortgage assumption approved by the lender, the original borrower remains responsible for the loan.

This means that even if another party takes possession of the property and makes payments, the original borrower’s credit is still on the line. Should the new owner fail to make payments, the original borrower’s credit score will be negatively affected, and the lender retains the right to pursue the original borrower for the debt. This can lead to consequences for the original borrower, including late fees, defaults on their credit report, and foreclosure proceedings against the property. A formal mortgage assumption or an approved release of liability from the lender is necessary to ensure the original borrower is no longer financially tied to the property’s debt.