Can You Transfer a Mortgage to Someone Else?

A mortgage transfer involves reassigning an existing home loan to another person or entity. While possible, it is often complex and requires lender approval. A mortgage represents a lien on a property, with the underlying debt tied to the original borrower unless formally transferred.

Understanding Mortgage Transfer Options

Several methods exist for mortgage transfer, each with distinct implications for the original borrower and the new party. A common method is a mortgage assumption, where a new borrower takes over the existing loan’s terms, including the original interest rate, repayment schedule, and outstanding balance. This transfer requires formal lender approval. The new borrower becomes responsible for payments, and the original borrower can often be released from liability.

Another approach is a “subject-to” transfer, where a buyer acquires the property but the existing mortgage remains in the seller’s name. The buyer agrees to make payments on the existing mortgage, but does not formally assume the loan, and the original borrower remains liable. This method avoids direct lender involvement, though the lender can still discover the transfer. Novation is a less common, but more comprehensive, method that replaces the original loan contract with a new one, fully releasing the original borrower from the debt. Novation requires lender consent and often involves renegotiating loan terms.

Most mortgages include a “due-on-sale” clause, also known as an alienation clause, allowing the lender to demand immediate repayment of the entire loan balance if the property is sold or transferred without consent. This clause protects lenders from loans with potentially lower interest rates being assumed by new borrowers. If a property is transferred without lender approval and the due-on-sale clause is invoked, the lender can require the full outstanding balance, potentially leading to foreclosure if the new owner cannot comply.

However, exceptions to the due-on-sale clause exist, established by federal law, such as the Garn-St. Germain Depository Institutions Act of 1982. This act prevents lenders from enforcing the clause in specific situations involving residential properties with fewer than five dwelling units. These exceptions include:
Transfers to a spouse or children.
Transfers upon the death of a borrower to a relative.
Transfers resulting from a divorce or legal separation agreement where a spouse becomes the owner.
Transfers into an inter vivos trust where the borrower remains a beneficiary and occupancy rights are not transferred.
Government-backed loans (FHA, VA, USDA) are assumable, making them more amenable to transfers with lender approval and new borrower qualification.

Information and Lender Approval Requirements

Initiating a mortgage transfer, especially an assumption, requires direct engagement with the mortgage servicer or lender. The first step involves contacting them to inquire about their policies and requirements for loan assumption. They will provide information regarding loan eligibility for transfer and the necessary steps.

Lenders evaluate the prospective new borrower against their underwriting standards, similar to applying for a new mortgage. This evaluation includes assessing the new borrower’s credit score, income, debt-to-income ratio, and employment history. The new borrower must demonstrate financial capacity to manage mortgage payments.

To facilitate this assessment, the lender requires various documents from the prospective new borrower. These include:
Recent tax returns.
Pay stubs.
Bank statements.
Authorization for a credit report pull.
The lender also requires completion of application forms for the assumption process.

The application process for an assumption involves submitting these documents and includes associated fees. These can encompass application fees, processing fees, and an assumption fee charged by the lender. The timeline for review and approval can vary, often taking weeks or months, depending on the lender’s internal processes and the completeness of submitted information.

Executing the Mortgage Transfer

Once lender approval is secured for a mortgage assumption, or a decision is made to proceed with a “subject-to” transfer, procedural actions are necessary to formalize the change. For an approved assumption, the new borrower will sign new loan documents, such as an assumption agreement and a promissory note. These documents legally transfer the mortgage obligation to the new borrower and often release the original borrower from liability.

A key step in any property transfer, including those involving a mortgage, is the transfer of the property’s legal title. This is accomplished through a new deed, such as a warranty deed or a quitclaim deed, conveying ownership from the original owner to the new owner. The type of deed used depends on the warranties the seller provides regarding the property’s title.

Following the deed transfer, it is important to record the new deed with the local county recorder’s office. This action makes the change in property ownership a public record, providing legal notice and protecting the new owner’s rights. Proper recording is a fundamental component of real estate transactions.

For “subject-to” transfers, where no formal lender approval is sought, the new owner must understand that the original borrower remains legally liable for the mortgage. While the new owner makes payments, they are not formally recognized by the lender as the borrower. Communication with the lender regarding payment arrangements can be beneficial, though the due-on-sale clause remains a potential risk. An escrow agent or closing attorney facilitates the entire transfer process. These professionals ensure all documents are properly executed, funds are disbursed correctly, and the deed is recorded, providing a secure and organized closing.

Common Situations for Mortgage Transfer

Mortgage transfers often arise in specific life events and property transactions, providing solutions for changing circumstances. In divorce settlements, one spouse often takes over the home and its existing mortgage. A mortgage assumption can formalize this arrangement, transferring responsibility to the spouse retaining the property and potentially releasing the other from liability.

When a property with an existing mortgage is inherited, the heir addresses the outstanding loan. Assuming the mortgage allows the heir to continue making payments under the original terms, which is advantageous if current interest rates are higher. This process ensures the property remains in the family without requiring a new loan.

Transfers between family members, such as parents to children, sometimes involve keeping the existing mortgage in place. This can be desirable to avoid new loan origination costs or retain a favorable interest rate. These transfers often fall under the exceptions to the due-on-sale clause, simplifying the process.

In some market conditions, sellers might market a property as having an assumable mortgage. This can be an attractive option for buyers, especially when current interest rates are higher than the rate on the existing mortgage. The buyer can benefit from a lower interest rate and reduced closing costs compared to obtaining a new loan.