Is a mortgage transfer possible—where you hand off a home loan from one person to another? The answer is usually no. When you sell your home, the buyers have to get their own mortgage and you pay yours off in full with proceeds from the sale.
But there are a few exceptions to the rule. Here are the ways you can transfer a mortgage, and why you might want to consider it.
What kinds of mortgage transfer are possible?
Most loans aren’t transferable, and the reason for this is that they have a “due on sale” clause, explains Chris Combs, founder of Combs Law Group. That means that when the property is sold, the entirety of the loan comes due.
But some loans are created without due on sale clauses, and so they can be transferred from seller to buyer. These are known as “assumable loans,” says Chris Lewis from Angel Oak Home Loans. There are three main types of assumable loans:
- VA loans are designed to be assumable because service members move frequently for their careers. Loans closed before March 1988 can be transferred freely, with no additional approval from the lender (however, given that those loans are now nearly 30 years old, there aren’t too many left around). Loans closed after that date must have the transfer approved by the lender, which means that the person on the receiving end of the transfer has to meet certain income and credit standards to qualify.
- FHA loans can also be designed to be transferable without lender approval. The loan must have closed before December 1989 (which also means not many are still around). Otherwise, the lender must approve the new borrower.
- USDA loans can also be transferred, but lender approval is required, and the recipient must not exceed certain income requirements.
Reasons to make a mortgage transfer
With today’s low-interest rates, there is less incentive to want to take over someone else’s mortgage. However, when rates rise, this option looks more attractive.
Taking over a loan also saves on closing costs: Instead of paying to originate a new loan and all the taxes and other closing costs associated with that, a buyer pays a nominal fee to assume the existing loan. You also don’t need a down payment to assume a loan.
However, even if a loan transfer is possible and preferable, there are some complications to the process.
Assumable loan disadvantages and dangers
Although you don’t need a down payment to assume a loan, you still might need to come up with a big chunk of change to make the transfer. Since you’re assuming only the existing loan amount, you are responsible for paying the seller for their equity in the home. The more equity a seller has, the more money the buyer has to pay up front.
For example, if the purchase price of the property is $300,000, but the seller has paid down the loan to $200,000, the buyer has to come up with the $100,000 difference that the seller has racked up in home equity.
If the buyers don’t have that much cash on hand, they can take out a secondary loan, but that loan will be at the current higher interest rate and include standard closing costs, making the transfer much less attractive.
Another thing to watch out for is that the original borrowers still retain responsibility for the loan unless they have a release in writing from the lender. If they fail to get this release, they are still liable if the new homeowner fails to repay the loan, and the loan debt will still count against them if they attempt to take out a new mortgage. If you do go through a loan assumption, be sure to hold onto your release paperwork in case there is ever an issue down the line.
When due on sale clauses don’t apply
Almost every loan other than a VA, FHA, or USDA loan will have a due on sale clause. However, because of a law called the Garn–St. Germain Act of 1982, there are some transfers that all lenders are required to allow despite the due on sale clause. Most of these are transfers between family members related to unanticipated changes in the homeownership, explains Combs. Here is a list of the most common exemptions:
- Loan transfer to a relative on the death of a borrower
- Loan transfer from a borrower to a spouse or children
- Loan transfer from one ex-spouse to another during a divorce or separation (if they continue to live there)
- Loan transfer to a living trust, if you continue to occupy the property
These transfers work by either adding a person to the home’s deed, removing a deceased owner from the home’s deed, or having the spouse giving up ownership sign a quitclaim deed.
Once ownership of the home has changed hands, the new owner can continue to pay the previous owner’s mortgage.
How living trusts work
For living trusts, the process is a bit more complicated. Living trusts are created to keep a property from going into probate when the owner dies, but is created before the former owner’s death.
“First the trust is created, typically by a lawyer, and then the property is deeded over to the trust,” explains Corey Chappell, closing options analyst with 181-Close-Now. “The trust now officially owns the property.”
As long as the former owner continues to occupy the home, the trust pays the mortgage. When the former owner dies, the trust’s beneficiaries can do as they wish with the home without having to go through probate. Here’s more on whether a living trust is right for you.