Can You Transfer a Mortgage to Another Person?

A mortgage transfer generally involves reassigning an existing home loan from the current borrower to another party. While it might seem straightforward, directly transferring a mortgage itself is uncommon due to standard clauses in most loan agreements. However, specific circumstances and alternative methods exist that allow for property ownership to change hands, even when an existing mortgage is present. The ability to transfer a mortgage depends heavily on the loan type and lender policies. This process can offer advantages, such as avoiding new closing costs or retaining a favorable interest rate.

Understanding Mortgage Transferability

Most residential mortgages contain a “due-on-sale clause,” also known as an alienation clause, which allows the lender to demand full repayment of the loan if the property’s ownership changes or if it is sold. This clause protects lenders from having loans transferred to less creditworthy borrowers or from losing the opportunity to issue new loans at current market rates. Consequently, this provision prevents a direct transfer of the mortgage to a new, unrelated owner without the lender’s express approval and a full loan payoff.

Despite the prevalence of due-on-sale clauses, certain exceptions exist where a mortgage might be assumable or where property can be transferred without triggering this clause. Assumable mortgages specifically permit a new owner to take over the existing loan terms, including the original interest rate and remaining balance. Government-backed loans, such as those from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA), are generally assumable, provided the new borrower meets qualification criteria. Conventional loans, which are not government-backed, rarely include assumability clauses, especially for third-party transfers.

Federal law, the Garn-St. Germain Depository Institutions Act of 1982, provides exceptions to the enforcement of due-on-sale clauses for certain transfers. This act prevents lenders from accelerating a loan in family-related or specific trust transfers. Transfers to a spouse or children are exempt, as are transfers resulting from a divorce or legal separation where an ex-spouse becomes the owner and occupies the property.

Transferring property into an inter vivos trust (a living trust) where the borrower remains a beneficiary and occupancy rights do not change does not trigger the due-on-sale clause. Transfers occurring by devise, descent, or operation of law upon the death of a joint tenant or the borrower are also protected, allowing heirs who occupy the home to assume the existing mortgage without needing to requalify under new terms. These exemptions ensure that ownership changes due to life events, rather than a traditional sale, do not automatically jeopardize the existing mortgage.

The Mortgage Assumption Process

When conditions for a mortgage assumption are met, such as with an assumable loan or an exempt transfer, a specific process must be followed. The first step involves contacting the current mortgage lender or loan servicer to determine if the loan is assumable and to understand their requirements. This inquiry confirms the loan’s eligibility and outlines documentation or application procedures for the new borrower.

The new borrower must undergo a qualification process with the lender. This includes a review of their credit history, income verification, and an assessment of their debt-to-income ratio to ensure they can manage the mortgage payments. The lender evaluates the new borrower’s financial capacity to take on the existing loan terms. This qualification can take several weeks or a few months to complete.

A key element of the mortgage assumption process for the original borrower is obtaining a formal release of liability, known as novation. Without this release, the original borrower may remain financially responsible for the loan if the new borrower defaults on payments. The lender’s approval of the assumption and the formal novation agreement legally transfers the obligation, protecting the original borrower from future liability.

Once the new borrower is approved and any conditions are met, legal documentation is prepared to formalize the transfer of the mortgage and property ownership. This includes signing assumption agreements with the lender and executing a new deed to transfer title to the new owner. The closing process for an assumption is similar to a traditional home purchase, though it may involve fewer closing costs than originating a new mortgage.

Other Ways to Transfer Property with an Existing Mortgage

When a direct mortgage assumption is not feasible or desirable, several alternative methods exist for transferring property ownership, though these generally involve handling the existing mortgage differently. A common approach is a standard sale of the property, where the seller uses the proceeds to pay off the existing mortgage in full. The buyer then obtains a new mortgage in their own name to finance the purchase.

Another option is seller financing, where the seller acts as the lender for the buyer. In this arrangement, the buyer makes payments directly to the seller according to agreed-upon terms. If the seller has an existing mortgage, they would need to pay it off, or remain responsible for making payments on their original loan while receiving payments from the buyer. This method offers flexibility but carries risks and complexities for both parties.

A “subject-to” transfer involves the buyer taking title to the property, but the original mortgage remains in the seller’s name. The buyer then makes payments on the seller’s mortgage, often directly to the lender. This strategy is high-risk for the seller, as they remain legally and financially liable for the mortgage if the buyer fails to make payments. The due-on-sale clause could still be triggered by the original lender, potentially leading to the loan being called due or foreclosure.

Lease-option agreements provide another alternative, allowing a tenant to rent a property with the option to purchase it at a later date. A portion of the rent payments may be credited towards the eventual purchase price, and an upfront option fee is paid to secure the right to buy. This arrangement delays the need for a mortgage transfer or a new mortgage until the option is exercised, giving the buyer time to prepare for financing.