Can I Transfer My Home Loan to Another Person?

Directly transferring a home loan to another person is not straightforward. Most conventional mortgage agreements contain a “due-on-sale” clause, which requires full repayment if the property is sold or transferred. However, specific situations allow a new party to take over an existing mortgage or for a property transfer to occur without triggering this clause.

Understanding Loan Transferability

A “due-on-sale” clause allows the lender to demand immediate repayment of the outstanding loan balance if the property is sold or transferred. This protects lenders from unvetted borrowers and ensures alignment with loan terms. Most conventional mortgages include due-on-sale clauses, making them non-assumable; a new buyer typically cannot simply take over the existing mortgage.

However, some mortgages are assumable. Government-backed loans, such as those insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA), and offered by the U.S. Department of Agriculture (USDA), often permit assumption. Even with these, the new borrower must meet eligibility criteria and receive approval from the original lender or relevant agency. The new borrower undergoes a credit and financial review, similar to applying for a new loan, to ensure they can meet mortgage obligations. This ensures the existing loan’s terms, including interest rate and remaining balance, are taken over by a qualified party.

The Assumable Loan Process

When a home loan is assumable, the process for a new borrower to take over the mortgage involves several detailed steps, all requiring lender approval. The prospective borrower first applies to the original lender to assume the existing loan. This application requires a comprehensive review of the new borrower’s financial standing, including their credit score, debt-to-income ratio, and employment history. Specific requirements vary by loan type (FHA, VA, USDA), often including minimum credit scores, debt-to-income ratios, and for USDA, household income limits and property location.

Once the application is submitted, the lender evaluates the new borrower’s qualifications to ensure they can comfortably manage the monthly payments. This underwriting process is similar to that for a new mortgage, verifying income, assets, and creditworthiness. An appraisal is not always required for an assumable loan, which can save time and money. If approved, the new borrower will sign an assumption agreement, formally accepting responsibility for the existing mortgage’s terms, including the original interest rate and remaining repayment schedule. This agreement typically includes paying an assumption fee and other closing costs.

Specific Transfer Scenarios

While due-on-sale clauses are common, federal law provides specific exceptions where a property transfer does not trigger the lender’s right to demand full loan repayment. One such scenario is a transfer of property due to divorce or legal separation. The Garn-St. Germain Depository Institutions Act of 1982 specifically prohibits lenders from enforcing a due-on-sale clause when property is transferred to a spouse or child as part of a divorce decree or legal separation agreement, provided the recipient intends to occupy the property. The spouse receiving the property can typically assume the existing mortgage without needing to requalify for the loan, although they do assume responsibility for payments.

Another common exception occurs when property is transferred upon the death of the borrower. Heirs inheriting a property with an existing mortgage can often assume the loan without triggering the due-on-sale clause. The Garn-St. Germain Act extends this protection to relatives inheriting property, allowing them to take over the mortgage at existing terms. The executor of the estate should notify the mortgage holder and ensure that mortgage payments continue during any probate process.

Transferring property into a living trust for estate planning also falls under an exception to the due-on-sale clause. If the borrower remains a beneficiary of the trust and there is no change in occupancy, the lender is prohibited from enforcing the due-on-sale clause. Lenders should be informed of such a transfer, but often do not require immediate loan repayment. The process usually involves preparing and recording a new deed to reflect the trust as the new owner.

Protecting the Original Borrower

When a home loan is assumed by another party, it is important for the original borrower to seek a formal release from liability. This release means the original borrower is no longer legally or financially responsible for the mortgage debt. Without a release of liability, the original borrower could remain accountable if the new borrower defaults on payments, potentially impacting their credit score. Lenders are not automatically required to release the original borrower from their obligations, even if the loan is assumable.

Obtaining a release of liability is a separate, formal step in the assumption process that requires lender approval. The original borrower should actively request this release from the lender, often through an “Assumption Agreement with Release of Liability” form, which is then recorded. In scenarios such as divorce, where one spouse is awarded the marital home and assumes the mortgage, it is particularly important for the departing spouse to ensure they are formally removed from the mortgage liability, not just the property deed.