Transfer of mortgage is a transaction where either the borrower or lender assigns an existing mortgage (bank loan to purchase a residential property) from the current holder to another person or entity. Homeowners who are unable to keep current on their mortgage payments may seek a transfer so that they do not default and go into foreclosure.
Not all mortgages are eligible for transfer. In order to transfer a mortgage, the lender will need to verify that the person or entity that will assume the mortgage has adequate income and credit history to be able to make payments in a timely manner.
Breaking Down Transfer of Mortgage
If a borrower is not allowed to transfer a mortgage, due to the loan's underwriting, they may need to explore other options to avoid foreclosure. For example, they could work with their lender to see if it is possible to add another borrower/owner to the mortgage, which would enable him/her to make payments toward the unpaid loan balance. Or they could sell the home and have a potential buyer, colleague, family member, or another entity agree to make up any difference between the home's sale price and the unpaid loan balance.
Why a Transfer of Mortgage Might be Desired Over a Sale
A buyer may want to take on an older mortgage because such a transfer could let them take advantage of previous interest rates that may have been lower than the current market rates. A transfer of the mortgage, if completed successfully without challenge or stipulations, would not change the terms or length of the loan, leaving just the remaining outstanding balance to be paid off. Through a transfer of the mortgage, a buyer might also avoid having to pay closing costs that are associated with buying a home with a new mortgage.
Lenders who want to deter a transfer of mortgage might include a clause in the mortgage that requires the remaining balance of the loan to be due on the sale of the property. This would force the seller to come up with the full balance that was due and likewise compel the buyer to take out a new mortgage to make the purchase.
It is possible to avoid triggering such a “due on sale” clause by transferring the mortgage to an immediate family member. Further, the transfer may be a result of an inheritance following the death of the borrower, and the family member is moving into the home. In such an instance, the lender might not have grounds to prevent the transfer of the mortgage.