Transfer of Mortgage: What it Is and How it Works

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

Rebecca McClay has 10+ years of experience writing and editing content. Rebecca is an expert in personal finance, business, and financial markets.

What Is a Transfer of Mortgage?

Transfer of mortgage is a transaction where either the borrower or lender assigns an existing mortgage from the current holder to another person or entity.

Homeowners who are unable to keep current on their mortgage payments may seek a transfer to avoid default and foreclosure. However, not every mortgage is transferable. Here’s how a transfer of mortgage works and how to determine if your mortgage allows this strategy.

key takeaways

• A transfer of mortgage reassigns an existing mortgage to another person or entity.
• Not all mortgages can be transferred.
• If a mortgage can be transferred, the lender must approve the new borrower.
• Many mortgage lenders include a due-on-sale clause that prohibits transferring a mortgage to a buyer.

How a Transfer of Mortgage Works

A transfer of mortgage allows a buyer to take over the current homeowner’s mortgage, assuming the same terms and conditions. If your mortgage allows it, this strategy can help you avoid foreclosure and may have advantages for the new mortgage owner.

The new mortgage owner may want to take on an older mortgage because it could allow them to benefit from previous interest rates. However, they may need to undergo a credit check by the lender.

A successful transfer of the mortgage would not change the loan’s terms or length. The new mortgage owner would only be responsible for the remaining outstanding balance. Additionally, a buyer might avoid paying closing costs associated with a new mortgage.

Not all mortgages are eligible for transfer. Those that are eligible are considered "assumable." To transfer a mortgage, the lender typically verifies that the new borrower has adequate income and credit history to make timely payments.

If you are not allowed to transfer a mortgage due to the loan’s underwriting, you may need to explore other options to avoid foreclosure. For example, you could work with your lender to arrange alternative payment options, such as a temporary suspension of your payment obligation.

Another option to avoid foreclosure is to sell the home and have a potential buyer, colleague, family member, or another party agree to cover the difference between the home’s sale price and the unpaid loan balance.

Special Considerations for Transfer of Mortgage

Lenders may include a clause in the mortgage requiring the remaining loan balance to be due on the sale of the property.

This due-on-sale clause prevents homeowners from transferring the mortgage to the buyer, potentially affecting a buyer’s offer if the mortgage interest rate is lower than current market rates. The clause requires the seller to repay the full outstanding balance, potentially using the sale proceeds, and prompts the buyer to obtain a new mortgage for the purchase.

Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations, even if ownership has changed.

You can potentially avoid triggering a due-on-sale clause by transferring the mortgage to an immediate family member or a spouse from whom you are legally separated or divorced.

Further, the transfer may occur due to an inheritance following the borrower’s death, and a family member is moving into the home. In such instances, the lender might not 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 usually be transferred as well.

Can You Add a Co-Borrower to Your Mortgage?

Once you have your own mortgage, you cannot add a co-borrower without refinancing the loan. Many mortgage lenders allow co-borrowers, but requirements will vary.

What Types of Mortgages are Assumable?

Assumable mortgages that can be transferred to another person or entity may include Federal Housing Authority (FHA) loans, U.S. Department of Agriculture (USDA) loans, and Veterans Affairs (VA) loans. Conventional mortgages backed by Freddie Mac or Fannie Mae are generally not assumable.

What Is an Unofficial Transfer?

An unofficial transfer is not a legal arrangement. In this case, the original homeowner continues to make payments to their mortgage lender, but they receive payments from another party to help them make the payments.

The Bottom Line

Whether you can transfer a mortgage to another party depends on the type of mortgage you have and the lender’s standards. Most conventional mortgages backed by Fannie Mae and Freddie Mac are not eligible for mortgage transfers. Before pursuing this foreclosure avoidance strategy, consider alternatives such as working with your lender or requesting forbearance.