What Exactly is a Mortgage Transfer?

With the typical sale of a property, the new owners usually apply for a mortgage to finance the purchase. When the sale is finalized, the new owners begin paying their new mortgage with the set of terms and interest rate that were agreed upon with their lender.

But in some circumstances, a mortgage may be transferred from the sellers to the new owners. While this doesn’t often happen with strangers, it may be more common when another family member takes over the property’s ownership.

Can a Mortgage Be Transferred?

While it’s certainly possible to transfer a mortgage, it’s usually quite difficult. If the home loan is assumable, then the mortgage may be transferred to someone else. Mortgages like these generally don’t contain any wording that prevents a loan transfer. Having said that, even assumable mortgages are often a challenge to transfer from one person to another.

In the majority of cases, the new borrower will still have to go through the process of qualifying for the mortgage. The lender will assess the typical factors that go into mortgage approval, such as the credit score, debt-to-income ratio, down payment amount, income, debt load, and loan-to-value ratio. Basically, the borrower would have to jump through all the same hoops to take over a mortgage as they would to secure a brand new home loan.

If a mortgage is assumable and the lender agrees to transfer it from the current owner to the new owner, a flat fee will usually need to be paid to the lender. The majority of government-backed home loans, such as FHA mortgages, are typically assumable, but conventional home loans usually aren’t. In this case, transferring a mortgage might be much more difficult.

“Due on Sale” Clauses May Prohibit a Mortgage Transfer

It’s highly unlikely to find a conventional mortgage that’s assumable. Most of them are not and typically include a “due on sale” clause, which means the mortgage will need to be paid down in full before ownership can be transferred. The new buyer would then need to take out a brand new home loan on the property.

Lenders include a due on sale clause on conventional mortgages because it’s not usually to their benefit to allow a mortgage transfer. If the original mortgage comes with an interest rate that’s a lot lower than what is currently available, the lender would essentially be losing out. The owner would not only pay a lower rate, but would also be able to avoid paying closing costs that are typically due when a new mortgage is taken out.

While these are clear benefits to buyers, they’re not very attractive to lenders, which is why due on sale clauses are usually present in a conventional mortgage.

Having said that, it may still be possible to transfer a mortgage, even if it is not assumable and has a due on sale clause. Mortgage transfers from one family member to another are often permitted. However, that would only be possible if the lender agrees to this arrangement. In this case, the seller would have to get touch with the lender to negotiate a mortgage transfer.

Exceptions to the Due on Sale Clause Rule

There may be certain circumstances where the lender can be prevented from exercising a due on sale clause. The most common scenario is when one owner passes away in a joint tenancy contract and the ownership is transferred to the surviving joint tenant. For instance, if one spouse dies, the surviving spouse would take over ownership.

Home loans may also be transferred to a family member when the borrower passes away, as well as in the case of a divorce agreement.

Refinancing as an Alternative

If a mortgage is not able to be transferred, it may be best to seek out a mortgage refinance. In this case, the new borrower would apply for a new loan to be used to cover the existing mortgage. Again, the new borrower would need to meet the typical criteria required to get approved for a mortgage in order for this arrangement to work out.

The Bottom Line

Mortgage transfers are usually not very common, but they do still happen. To increase the odds of a mortgage transfer approval, the existing loan will usually need to be assumable and not contain a due on sale clause. At the same time, the new borrower would need to be financially fit in order to qualify. In the absence of these factors, a mortgage transfer might be much more difficult.