When life circumstances change, homeowners can sometimes wonder if that means they can transfer their mortgage to another person. Financial hardship and divorce aren’t the only reasons; selling a home to a relative also makes transferring a mortgage seem potentially attractive. But it is not always straightforward and usually involves lender requirements and legal considerations as to who owns the mortgage.
So in this article, we are going to take a look at if transferring a mortgage is possible, the kind of transfer, all the options out there and how to successfully transfer a mortgage.
Let’s Understanding Mortgage Transfers
When a lender transfers a mortgage over, it is when an existing mortgage loan is legally transferred from the original borrower to another person. They will take over the responsibility of repaying the mortgage loan. Although it sounds straightforward, mortgage transfers generally require lender approval and specific loan model terms.
Are Mortgages Transferable?
Not all mortgages are transferrable to another individual. Given that a mortgage is assumable, whether (or not) the mortgage is transferable depends on whether or not it has an “assumable” clause.
Assumable Mortgages
An assumable mortgage lets a new borrower step into the existing terms of the loan, including the interest rate and remaining balance. There are two common types of loans that often come with assumable clauses:
- FHA Loans: FHA (Federal Housing Administration) loans are usually assumable as long as a buyer fulfills the lender’s requirements to take the loan over.
- VA Loans: Veterans Affairs (VA) loans are assumable lists as well, although the new borrower would need to meet VA eligibility requirements or receive lender approval.
VA Assumable Loan
A VA assumable loan is a mortgage that’s backed by the U.S. Department of Veterans Affairs and can be assumed by another person under the terms of the existing mortgage. This can be an excellent solution for qualifying borrowers hoping to take advantage of an existing lower rate. New borrowers must meet the following criteria to take over a VA loan:
- Meet the lender’s credit and income requirements
- Be approved by the lender
- Assume all mortgage liabilities
Moreover, if a non-veteran takes over the loan, the original borrower’s VA loan entitlement can still be associated with the property until the mortgage is paid off.
Non-Assumable Mortgages
Most conventional loans come with the requirement that they are not assumable in other words, they can’t be transferred to someone else. That’s because lenders almost always write in a “due-on-sale” clause, so the unpaid balance must be paid when the home is sold.
When a Transfer of the Mortgage Could Be Possible
Although a mortgage may not be technically assumable, transferring a mortgage can be possible in a few situations:
1. Transferring a Mortgage to a Family Member
Some homeowners want to pass on their mortgage to a family member, like a child or sibling. This is sometimes done through lender approval, which can pass through to the new borrower, particularly if he or she meets credit and income qualifications.
2. Transferring a Mortgage during Divorce
One spouse might want to have the other take over the mortgage in a divorce. Mortgage lenders do not automatically remove one spouse’s name, but refinancing or assuming the mortgage can allow the lender to take full responsibility for the loan.
3. Estate and Inheritance Transfers
When a homeowner dies, their mortgage usually becomes part of the estate. If a family member inherits the mortgage, the lender cannot demand immediate repayment. Instead, the inheritor can take over the loan or refinance it in their name.
4. Selling a Home with an Assumable Mortgage
For a home with an assumable mortgage, the seller can transfer it to an eligible buyer. The new buyer still has to qualify with the lender in terms of credit and income verification.
Steps to Transfer a Mortgage
However, if you do wish to transfer a mortgage over to someone, the process typically goes as follows:
Step 1: Determine If the Mortgage Is Assumable
To start, check the mortgage agreement to see if an assumable clause exists. The lender will have certain procedures to transfer the mortgage if it is assumable.
Step 2: Contact the Lender
But even if the mortgage is assumable, you will need to notify the lender. They will explain what will be required from the new borrower and what documentation will be needed.
Step 3: Determine the New Borrower’s Qualification
The new borrower must qualify under the lender’s guidelines, including:
- A good credit score
- Income enough to make mortgage payments
- A stable employment history
- A low debt-to-income ratio
Stage 4: Turn in the Necessary Paperwork
The new borrower needs to fill out an application, provide required documentation (e.g.):
- Proof of income (pay stubs, tax returns)
- Credit history report
- Identification and residency proof
Step 5: Get Your Lender Pre-Approved
The lender’s approval would include them amending the mortgage agreement to reflect the name of the new borrower.
Step 6: Finalize the Transfer
Once approved, the mortgage transfer becomes legally binding and the new borrower is responsible for paying future payments.
What are Some Alternatives to a Mortgage Transfer?
When a mortgage transfer isn’t an option, there are other paths to homeownership transfer:
1. Refinancing the Mortgage
One other option is refinancing the mortgage in the new borrower’s name. That means getting a new loan and paying off the old mortgage.
2. Adding a Co-Borrower
A homeowner can also add another person as a co-borrower rather than transferring a mortgage. This can be useful if the original borrower wants to share liability but not fully relinquish the loan.
3. Selling the Property
If transferring the mortgage does not work but neither do potential renovations, your best bet may be to sell and pay off the mortgage.
Pros and Cons of Transferring a Mortgage
Pros:
- Allows a lower interest rate (if assumable) to remain.
- Prevent paying closing costs of the new loan
- Useful in divorce or inheritance situations
Cons:
- It may be challenging to get approved for a loan
- The new borrower needs to be eligible under stringent conditions
- Not all mortgages will be assumable
Conclusion
In some instances, a mortgage can be transferred to someone else, but it depends mainly on the type of loan and the lender’s policies. FHA and VA loans are more likely to be assumable, whereas most conventional loans require the borrower to refinance or sell the home. Before attempting a mortgage transfer, be sure to consult your lender and try all available options to see what is the best course of action.
If you’re thinking of transferring your mortgage, consulting with a mortgage professional can guide you through the process and help you identify the best option for you.