Can You Transfer a Home Loan to Another Person?

Transferring a home loan to another person can appear to be a straightforward solution, but it is a complex process. Most mortgage contracts contain clauses that restrict such transfers. Understanding when a loan transfer, called an assumption, is possible, and available alternatives, is important for homeowners and prospective buyers.

Understanding Loan Transferability

A mortgage loan’s transferability is largely determined by a “due-on-sale” clause, also referred to as an “alienation clause.” This clause is standard in most conventional mortgage contracts. It protects the lender’s interest by requiring full repayment of the loan balance when the property is sold or transferred.

When a due-on-sale clause is present, the lender can demand the entire outstanding loan balance be paid off at the time of sale. This prevents a new buyer from simply taking over the existing mortgage at its original terms, which might have a lower interest rate than current market rates. If a homeowner attempts to sell or transfer the property without satisfying this clause, the lender could initiate foreclosure. This ensures the lender can re-evaluate loan terms and the new borrower’s qualifications.

There are, however, limited exceptions where a due-on-sale clause may not be enforced, even in conventional loans. These involve transfers due to inheritance, divorce, or to a living trust where the original borrower remains a beneficiary. In these scenarios, federal regulations may prevent lenders from invoking the clause, allowing the mortgage to remain. For most sales involving conventional loans, the buyer will need a new mortgage.

Types of Assumable Loans and Their Requirements

While most conventional loans include due-on-sale clauses, certain government-backed loans are assumable, meaning a qualified buyer can take over the existing mortgage. These include loans insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA), and backed by the U.S. Department of Agriculture (USDA). A primary benefit of assuming such a loan is often the ability to retain the original, potentially lower, interest rate and existing loan terms, which can lead to significant savings over the life of the loan.

FHA loans are assumable if the new borrower meets FHA and lender requirements. The buyer must undergo a creditworthiness review, demonstrating stable income and an acceptable debt-to-income ratio, around 43% or less. A minimum credit score, often 580, is generally required, and the property must be the new borrower’s primary residence. The FHA also requires the property to meet its safety, security, and structural soundness standards.

VA loans are also assumable, benefiting both seller and buyer. Any purchaser, including non-veterans, can assume a VA loan, but they must meet the lender’s credit and income requirements, such as a credit score above 620 and a debt-to-income ratio below 41%. For the original veteran borrower, if a non-veteran assumes the loan without a substitution of entitlement, the veteran’s entitlement remains tied to that loan, potentially affecting their ability to obtain another VA loan with no down payment. The assuming borrower will also typically pay a VA funding fee, which is a percentage of the loan balance, often around 0.5%.

USDA loans, for rural properties, can also be assumed under specific conditions. The new borrower must meet USDA income limits, capping household earnings at 115% of the area’s median income, and the property must remain in an eligible rural area. The new borrower must be creditworthy and occupy the home as their primary residence. The existing USDA loan must be in good standing for the assumption to proceed.

Navigating the Mortgage Assumption Process

Once an assumable loan is identified and a buyer understands the criteria, the assumption process begins. The first step is contacting the current loan servicer, who manages the mortgage and provides assumption procedures. The servicer confirms assumability and outlines application steps.

The buyer then submits an assumption application package to the loan servicer. This package includes financial documentation like pay stubs, tax returns, bank statements, and information on assets and debts. This initiates underwriting, where the servicer evaluates the new borrower’s financial qualifications, similar to a new mortgage application. This ensures the new borrower can meet loan obligations.

Upon successful underwriting, the lender issues approval. The formal loan transfer involves signing assumption documents, legally binding the new borrower to the mortgage terms. There are typically fees associated with this process, which can include an assumption fee ranging from a few hundred dollars to a percentage of the loan amount, as well as prorated property taxes and insurance. These costs are generally lower than those associated with obtaining a new mortgage.

A crucial step for the original borrower is to obtain a formal release of liability from the lender. While the new borrower assumes responsibility, the original borrower remains legally accountable if a release is not secured. This release ensures the original borrower is no longer responsible for future payments or defaults. The lender typically provides this release after the new borrower is approved and the assumption finalized.

Options When Loan Transfer Is Not Possible

In most real estate transactions, especially with conventional mortgages, a direct loan transfer is not feasible due to a due-on-sale clause. The primary and most straightforward alternative for a homeowner wishing to sell is for the buyer to obtain their own new mortgage. The seller pays off their existing loan with sale proceeds at closing, while the buyer secures independent financing. This ensures the seller’s mortgage is satisfied and the buyer assumes a new loan tailored to current market conditions and their financial profile.

While securing a new mortgage is the standard approach, other less common or more complex alternatives might be considered in specific circumstances. One such option is a “gift of equity,” which can occur between family members, where the seller provides a portion of home equity to the buyer, reducing the amount to finance. This facilitates a sale but requires considering tax implications and lender policies. Another alternative is seller financing, where the seller acts as the lender. This bypasses traditional lenders but carries risks for both parties, including the seller’s continued liability if their original mortgage is not paid off, and the buyer’s challenges in securing clear title or future refinancing. These alternatives are more intricate and carry higher risks than a traditional sale and new mortgage.