What Is a Transfer of Mortgage?
Transfer of mortgage is a transaction where either the borrower or lender assigns an existing mortgage (a loan to purchase a property—usually a residential one—using the property as collateral) 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.
- A transfer of mortgage is the reassignment of an existing mortgage, usually on a home, from the current holder to another person or entity.
- Not all mortgages can be transferred; if they are, the lender has the right to approve the person assuming the loan.
- Mortgage lenders often include a due on sale clause in their loans that prohibits a home seller transferring a mortgage to a buyer.
How a Transfer of Mortgage Works
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.
Not all mortgages are eligible for transfer. If it is, the mortgage is said to be "assumable." In order to transfer a mortgage, the mortgage lender will need to verify that the person or entity that will assume the loan has adequate income and credit history to be able to make payments in a timely manner.
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.
Special Considerations for Transfer of 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 due on sale clause ensures that when homeowners sell their houses, they cannot transfer the mortgage to the buyer (which could play a key part in a homebuyer's making an offer, especially if the mortgage interest was lower than the current market rates). These clauses in effect require the seller to repay the full outstanding balance on the loan, perhaps with the sale proceeds, and likewise compel the buyer to take out a new mortgage to make the purchase.
Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed.
It is possible to avoid triggering such a “due on sale” clause by transferring the mortgage to an immediate family member, or to a spouse from whom one is legally separated or divorced. 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. If the property is transferred to a living trust and the borrower is the trust’s beneficiary, the mortgage can also be transferred as well, usually.