When you sell a house or move out, it might make sense to try and transfer the mortgage to the new owner. Instead of applying for a new loan, paying closing costs, and starting over with higher interest charges, the new owner could take over the current payments.
Loans that you can transfer do exist. They are called "assumable loans." However, there are not many offered. Find out more about transferring a loan and what you can do if you need to transfer one, but it isn't assumable.
- You can transfer a mortgage to someone else as long as the loan is assumable.
- The new borrowers will be treated as if they were initiating a new loan for themselves.
- If your mortgage is not assumable, you still have options even if your lender says no.
If a loan is "assumable," you're in luck: That means you can transfer the mortgage to somebody else. There is nothing written into the loan agreement that prevents you from completing a transfer. However, even assumable mortgages can be difficult to transfer.
In most cases, the new borrower needs to qualify for the loan. The lender will look at the borrower’s credit scores and debt-to-income ratios to evaluate their ability to repay the loan. The process is the same as if the borrower was to apply for a brand new loan.
Lenders approved the original loan application based on your credit and income. They won't want to let you off the hook unless there's a replacement borrower who is just as likely to repay.
To complete a transfer of an assumable loan, request the change with your lender. You'll have to complete applications, verify income and assets, and pay a fee during the process.
Where To Find One
Unfortunately, assumable mortgages are not widely available. If you have an FHA or a VA loan, you might be in luck, because they are assumable loans. Other conventional mortgages are rarely assumable. Instead, lenders use a due-on-sale clause, which means that you must pay off the loan when you transfer title to the property.
Lenders don’t usually benefit from letting you transfer a mortgage (they lose interest payments that they would get from a new loan), so they're not eager to approve transfers. Buyers would come out ahead by getting a more “mature” loan, with the early interest payments out of the way. Sellers would get to sell their house more easily—possibly at a higher price—thanks to those same benefits.
Exceptions to the Rule
There are some cases where you can transfer a loan with a due-on-sale clause. Transfers between family members are often allowed, and your lender can always choose to be more generous. The only way to know for sure is to ask your lender and review your agreement with an attorney.
Even if lenders say it’s not possible, an attorney can help you figure out if your bank gives you the correct information.
Switching out names on a loan only affects the loan. You'll still need to transfer the title using a quitclaim deed or any other steps required in your situation.
Federal Deposit Insurance Corporation (FDIC) laws prevent lenders from exercising their option to accelerate payment under certain circumstances. Review with your attorney to see whether you qualify to transfer without an accelerated payment. Several of the most common situations include transferring:
- To a surviving joint tenant when the other one dies
- To a relative after the death of a borrower
- To the spouse or children of a borrower
- As a result of divorce and separation agreements
- Into an inter vivos trust (living trust) where the borrower is a beneficiary
If you can’t get your request approved, you might be tempted to set up an “informal” arrangement. For example, you could sell your house, leave the existing loan in place, and have the buyer reimburse you for mortgage payments.
However, there are some issues with this. Your mortgage agreement probably does not allow this, and you might find yourself in legal trouble if your lender finds out. What’s more, you’re still responsible for the loan, even though you’re no longer living in the house.
What could go wrong? A few possibilities include:
- If the buyer stops paying, the loan is in your name, so it’s still your problem. The late payments will appear on your credit reports, and lenders will come after you.
- If the home is sold in foreclosure for less than it’s worth, you could be responsible for any deficiency.
There are other ways to offer seller financing to a potential buyer, including allowing a rent-to-own arrangement where part of the rent goes toward a down payment should the renter elect to buy.
If you can’t get a mortgage transferred, you’ve still got options, depending on your situation.
Death, divorce, and family transfers might give you the right to make transfers, even if your lender says otherwise.
Some government programs make it easier to deal with the mortgage if you're facing foreclosure—even if you’re underwater or unemployed. Contact the U.S. Department of Housing and Urban Development (HUD) to find out what applies in your situation.
If you’re getting divorced, you can ask your attorney how to handle all your debts and how to protect yourself in case your ex-spouse does not make payments. If you're not on the title but were married to the homeowner, a local attorney can help you determine what to do next if they have passed away.
You can transfer your home into a trust, but be sure to double-check with your estate planning attorney to ensure that you will not trigger an acceleration clause.
If a loan is not assumable and you can’t find an exception to a due-on-sale clause, refinancing the loan might be your best option. Similar to an assumption, the new borrower will need sufficient income and credit to qualify for the loan.
The new homeowner will need to apply for a new loan individually and use that loan to pay off the existing mortgage debt. You may need to coordinate with your lenders to get liens removed (unless the new borrower and new lender agree to them) so you can use the house as collateral, but it’s a good, clean way to get the job done.
Frequently Asked Questions (FAQs)
Can you add a co-borrower to a mortgage without refinancing?
No, to add a borrower to, or remove one from, a mortgage, refinancing is required. During the process, you'll be able to add the new co-borrower to the mortgage and deed.
Do assumable mortgages require a down payment?
Assumable mortgages require a down payment relative to what is owed on the house and its overall value. If the home is worth $200,000 with $100,000 left on the mortgage, the buyer will need to cover that cost as the down payment.