How To Transfer Ownership Of A House With A Mortgage?

Transferring ownership of a house that has a mortgage on it can get a bit complicated. Knowing your options can make the process easier for yourself as well as the new owners.

Transferring ownership of a house with an existing mortgage can be a complex process that requires careful consideration and adherence to legal requirements. Whether you pass down the property to a family member, sell it to a new buyer, or make other arrangements, understanding the steps involved is crucial for a smooth transition.

This comprehensive guide aims to provide valuable insights into transferring ownership of a house with a mortgage. We will explore the legal implications, necessary documentation, and key considerations that come into play during the transfer process. From obtaining consent from the mortgage lender to handling title transfers and potential refinancing, each step will be demystified, helping you confidently navigate this intricate process.

Whether you are a homeowner seeking guidance or a potential buyer or recipient of a mortgaged property, this article is designed to equip you with the knowledge needed to make informed decisions and ensure a successful ownership transfer.

What Is A Transferable Mortgage?

 Image Source: Walshs
Image Source: Walshs

As the name suggests, a transferable mortgage is a loan that can be transferred from one person to the other, subject to other conditions. A transferable mortgage is most commonly known as an assumable mortgage. The original borrower can hand over the mortgage to another person, who agrees to pay the remaining amount at the same interest rate as the original borrower. After the assumable mortgage has been transferred to the other person, you no longer have the responsibility to pay it off. If any issue arises, the lender will contact the new mortgage owner to resolve it.

How can you transfer a mortgage?

If you’re considering transferring your mortgage, following the steps to ensure a smooth process is essential. Here’s a breakdown of all the steps involved in transferring a mortgage:

 Image Source: MARCA
Image Source: MARCA

●    Review your mortgage documents

Carefully examine your loan agreement to determine if transferring the mortgage is allowed. Check for a due-on-scale clause, which might restrict transfers unless certain circumstances apply.

●    Initiate a transfer

Contact your lender to start the transfer process. Requirements vary based on the lender and loan type. You’ll likely need to submit a “release of liability” form for FHA loans, which the new owner must meet creditworthiness criteria. Additionally, the buyer may need to provide additional funds to cover the remaining balance on the loan.

●    Seek professional assistance

If your situation involves a divorce inheritance or joint tenancy, it may be wise to seek assistance from an attorney. They can ensure a smooth transfer process. Otherwise, follow your lender’s guidance.

●    Complete the transfer

Follow your lender’s outlined process. Typically, it takes around 45 days for the loan to be processed, including the credit check. Keep making payments until you’re officially notified that you’re no longer responsible for the loan.

Remember, even a single late payment can harm your credit and lead to delinquency. There’s also a chance that the transfer may not be approved. Therefore, it’s crucial not to take any unnecessary risks.

How Do You Transfer A House With A Mortgage?

Transferring ownership of a house with a mortgage can be a complex process that is best navigated with the assistance of a real estate attorney. Here is a simplified overview of all the steps involved:

 Image Source: Service SA
Image Source: Service SA
  1. Determine the Transferee: Select the individual you wish to transfer the property ownership to. This can be friends, family members, or any other party.
  2. Establish Transfer Terms: It is advisable to work with an attorney to define the terms of the transfer. While not mandatory, their expertise can help avoid potentially costly taxes, fees, and other legal errors.
  3. Complete a Change of Ownership Form: State laws and forms differ, so it may be prudent to engage a lawyer for assistance. Additionally, you will need to update the name on the property title.
  4. Select the Appropriate Deed and Prepare Documentation: If possible, choose the appropriate deed and assemble the necessary paperwork with the guidance of a lawyer. The specific method will depend on your state and local regulations. Typically quitclaim deeds are commonly used as they transfer one person’s rights in a property to another without making any guarantees. An attorney specializing in real estate transfers can assist in determining the most suitable approach for your situation.
  5. Notarize and File the Deed: Once the deed is prepared, have it notarized and file it accordingly. This finalizes the transfer of ownership.

It is essential to note that the transfer process may vary depending on the jurisdiction and the mortgage agreement terms. Consulting professionals such as real estate attorneys can provide personalized guidance based on your circumstances, ensuring a smooth and legally compliant transfer.

How Can Having An Assumable Mortgage Help With Transfer of Ownership?

An assumable mortgage, known as a transferable mortgage, makes it very easy to transfer your mortgage to another person. This is because it is built with certain clauses that allow it to be paid off by another person. Even with an assumable mortgage, transferring the mortgage to another person has to be approved by the lender.

 Image Source: Boulder Home Source
Image Source: Boulder Home Source

The lender wants to ensure that the new loan owner can pay off the mortgage. For this purpose, the lender will perform an eligibility check much like the original borrower of the mortgage had to go through. This will include checking if the new owner has enough income, has a relatively low loan-to-income ratio, is of suitable age, and has a good credit score as well. Reliable house surveyors could also be called in to assess the state of the property and ensure it is in good condition for the next buyer. If the new buyer of your home fails to meet the lender’s eligibility criteria, the original buyer will have to continue with the payments.

Assumable mortgages are not very commonly available. Most mortgages have a due-on-sale clause, which means that the entire leftover mortgage on the house becomes due on the borrower if they move to sell the home. Some loans backed by the Federal Housing Administration (FHA) and some by the Veterans Administration (VA) do not have the due-on-sale clause and are assumable. VA loans issued before March 1988 are automatically assumable without involving the lender. Newer FHA and VA loans need lender approval to transfer a mortgage.

What Is An Unofficial Transfer Of Mortgage?

Unofficial transfers are not only risky they are generally considered illegal as well. An unofficial mortgage transfer occurs between the buyer and seller of the property. If the buyer is denied a mortgage transfer by the lender, the buyer and seller can come to an understanding among themselves. Under the understanding, the buyer agrees to continue reimbursing the seller for the monthly mortgage payments provided the house is transferred in the buyer’s name.

 Image Source: California Business Lawyer
Image Source: California Business Lawyer

This is a huge risk, as the buyer may refuse to make payments after some time. This will mean that the seller is now responsible for not only the payments on the mortgage but also does not own the house anymore. In case of foreclosure, if the house sells for less than the loan amount, the seller is responsible for making up the difference in the balance.

Transferring Ownership Of A House To A Family Member

An assumable mortgage is necessary if you want to transfer the ownership of a mortgaged house to another individual. If your mortgage has a due-on-sale clause, you must pay off the remaining mortgage to the lender as soon as you sell the house. But, like other rules, this rule also has exceptions. However, if you want to transfer the ownership of your house to a family member, like a child or spouse, you can do that even if you do not have an assumable mortgage. Remember that transferring ownership of a house to your child does not equal transferring the mortgage to them. You may still be left with the responsibility of paying off the mortgage.

 Image Source: Chapman, Robinson & Moore
Image Source: Chapman, Robinson & Moore

Quitclaim Deed

A quitclaim deed is a deed that releases a person from any interests or rights on the property and without any warranties about the person’s interests or rights in the property. Simply put, your child owns the house without any liability towards the mortgage on the house. The quitclaim deed will not affect the mortgage one way or the other. You still have to pay the mortgage due to a house that is no longer your property.

One complication that can arise from a quitclaim deed is that the due-on-sale clause of your mortgage becomes valid. However, you may talk to your lender to negotiate more generous terms for the loan. Furthermore, under certain circumstances, the Federal Deposit Insurance Corporation (FDIC) does not allow accelerated payments, and you can be exempt from the due-on-sale or accelerated clauses. These conditions apply when transferring ownership to:

  1. A surviving joint tenant when the other one dies
  2. The spouse or child of the borrower
  3. A relative, after the death of the borrower

Transfers due to divorce or separation or to a living trust where the beneficiary is the borrower may also warrant an exemption from the due-on-sale clause. Talk to your attorney to see if your circumstances make you eligible for the FDIC protections.

If you qualify to forego the accelerated payment, you can transfer the mortgage to the child, spouse, or relative along with the ownership of the property. This is the best financial arrangement when selling your house.

Transfer By Sale

You can also transfer the ownership of your house to your relative by selling the property to them. The property must be sold at market value; otherwise, it will be considered a gift. Gifts of property or land carry a gift tax that can be as much as 55 percent of the property’s market value and is payable by the donor of the gift. At the same time, your child or relative will also have to pay the capital gains tax on the property. Again, you can talk to your lender or attorney to transfer the mortgage instead of paying it as per the due-on-sale clause.

Transfer by Death Deed

The transfer by death deed, also known as Donation Mortis Causa, allows your property to be transferred to your heirs without probate. Under this deed, the property is transferred to the individual you name in the deed after you pass away without having to go through the legal process of verifying a will which can take weeks, if not months. It makes handling your legal matters much faster and more efficient for your grieving relatives. You do not have to worry about any remaining mortgage on the property – it will simply pass along to your heirs.

The Donation Mortis Causa is only available in 25 states and the District Of Columbia. Check your state laws to see if this option is available to you or not.

Transfer by Title Deed

Another way to transfer your property to your relatives or family members is to add their names to the title deed when you are still alive. With your child’s name on the title, they will be a joint owner of the house and will be responsible along with you to pay off the mortgage. This is a straightforward, hassle-free way to avoid the due-on-sale clause when signing over your property to transfer ownership. By adding your child, spouse, or relative’s name to the title deed, you effectively transfer ownership of the house and the mortgage to them as well.

Transfer by Gift

To transfer home as a gift to a family member or a friend, you must complete a specific form. For the transfer to be considered a gift, you should not have any expectation of compensation. However, it’s important to note that you may be required to pay a gift tax if the value of the gift exceeds $15,000 per year.

A gift deed can be revocable and often functions as a delayed exchange of ownership. It’s crucial to consult a financial adviser before proceeding, as tax implications are involved. Typically, donors are responsible for paying both federal and state gift taxes.

Transfer Of Mortgage

Mortgage transfer is only possible if your mortgage is assumable or transferrable. The lender will run an eligibility check on the new borrower of the loan. You can transfer the mortgage to the child by adding their name to your property’s title deed or the transfer of death deed. You can also add a spouse, child, or relative to your single mortgage and convert it into a joint mortgage. In most of these cases, you will need to consult your lender or attorney.

Alternative Options for Mortgage Transfer

If you don’t qualify for a mortgage transfer or it doesn’t seem like the right solution, other methods could help you escape your current mortgage.

Refinancing You Loan

One option is to refinance your loan, which involves paying off your existing mortgage with a new loan from either your current lender or a different one. Depending on your creditworthiness, this could lead to a lower interest rate, saving you money on interest and potentially allowing you to pay off your loan more quickly.

Refinancing also allows you to adjust your repayment term, switch between fixed and adjustable rates, or change mortgage lenders.

Selling Your Home

Instead of transferring your mortgage, you can sell your home. By doing so, you can utilize the proceeds from the sale to pay off your mortgage while the buyer assumes responsibility for the property.

Another possibility is considering a rent-to-own agreement, where a portion of the rent payments can be credited towards a down payment if the renter chooses to purchase the home.

Transferring Into a Trust

Alternatively, you can transfer your assets, such as your home, into a living trust. This can provide peace of mind as it bypasses the probate process, which occurs after your passing and involves the court-appointed executor distributing your assets. By placing your assets in a living trust, your beneficiaries can avoid probate, potentially saving them time and effort, regardless of whether you have a will.

What is Due On Sale?

When transferring ownership of a house with an existing mortgage, “due on sale” refers to a clause commonly found in mortgage agreements. This clause states that if the property is sold or transferred to a new owner, the lender can demand immediate repayment of the outstanding mortgage balance.

The due-on-scale clause is included in mortgage contracts to protect the lender’s interests and ensure they have control over the loan repayment terms. When a property is sold, the lender may require the borrower to pay off the remaining mortgage balance in full, typically upon the transfer of ownership. If the borrower fails to do so, the lender can initiate foreclosure proceedings to recover their funds.

 Image Source: Incorporated.Zone
Image Source: Incorporated.Zone

The causes or reasons behind the inclusion of the due-on-scale clauses are primarily related to the lender’s risk management and financial stability. Here are a few key reasons.

  • Preservation of Contract Terms: Lenders want to ensure that the original terms of the mortgage contract, including interest rates and repayment schedules, are not altered or assumed by a new owner. By triggering the due-on-sale clause, they can enforce the original terms or negotiate new ones with the new owner.
  • Risk Mitigation: Lenders evaluate borrowers based on their creditworthiness and ability to repay the mortgage. When ownership changes hands, the lender may perceive increased risk as the new owner’s financial situation and creditworthiness may differ from the original borrower. Requiring repayment upon sale helps mitigate potential risks associated with a new owner assuming responsibility for the mortgage.
  • Changing Market Conditions: Mortgage lenders consider prevailing market conditions when setting interest rates. Suppose interest rates have significantly changed since the original loan was issued. In that case, the lender may want to adjust the terms to reflect the current market rates, which would be more difficult if a new owner assumed the mortgage.

It’s important to note that specific terms of the due-on-sale clause can carry between mortgage agreements and jurisdictions. Some exceptions and exemptions might exist under certain circumstances, such as transfers between family members or certain types of refinancing. It’s advisable to consult the terms of the mortgage agreement and seek legal or financial advice when considering a transfer of ownership with an existing mortgage.

FAQs

Is it possible to transfer ownership of a house to a family?

Certainly! Transferring ownership of a house to a family member is a common practice apart from regular home sales. This type of transfer often occurs during property exchanges following a death or divorce. Quitclaim deeds are typically utilized for these transfers.

Is it possible to remove someone’s name from a mortgage without refinancing?

Removing someone’s name from a mortgage without refinancing is indeed feasible, although it can be challenging. Seeking advice from a loan officer regarding mortgage modification or loan assumption is generally the recommended course of action.

Can I assume my parents’ mortgage?

Yes, it’s possible to assume your parent’s mortgage. Suppose your parents want to transfer the property to you and have you take over the mortgage payments. But the mortgage needs to be assumable. If it’s not, then negotiation or legal arrangements may be required.

Is it possible to retain a mortgage in the name of a deceased person?

Regrettably, it is not possible to maintain a mortgage in the name of a deceased individual. The estate’s heirs must decide between paying the existing mortgage, selling the property, or refinancing the home in their names.

How can I assume my deceased parent’s mortgage?

The process varies depending on the specific circumstances and state laws, although FDIC regulations may override certain laws. In many cases, a mortgage assumption can be pursued, wherein you take responsibility for the mortgage payments previously made by the deceased property owners.

In some instances, it may be necessary to use other assets from the estate to pay off the existing mortgage before retaining ownership of the home. Alternatively, a new mortgage might be required to settle the remaining balance.

Conclusion

A transfer of mortgage is probably the best option for you if you fear you might default on the loan and face foreclosure. Your lender will want to make sure that the new borrower is able to pay off the loan and run an eligibility check to confirm this. In any case, talk to your lawyer and your mortgage servicer to carefully evaluate your options.

Tony Bennett

Tony Bennett

Tony Benett makes his living in the insurance industry by teaching and consulting. He is also recognized by the legal profession as an expert on insurance coverages. His insurance experience includes having worked at the company level, owned an independent general agency and having worked for an insurance association. He has received various certificates over the past few years and helps his clients and readers by giving them a realistic outlook on what they can expect to achieve within their set targets. At Insurance Noon, he is known for his in-depth analysis and attention to details with accuracy. He has been published as one of the most referred agents by his peers in the insurance community. Tony loves the outdoors and most sport events. His passion other than providing excellent advice is playing golf.

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