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.
If buyers have to buy a house with a mortgage on it, they will prefer one with a transferable mortgage. Assuming the responsibility of an existing mortgage is helpful in many ways – buyers avoid having to pay the costs associated with a new mortgage, like origination costs, closing costs, and the lender’s costs. The interest rates may also be higher as compared to when the original loan was taken out, so buyers prefer to pay off the existing leftover loan with the old rates, instead of getting a new loan with higher rates. But can homeowners sell their house with a mortgage on it? In this article, we discuss how do you transfer ownership of a house with a mortgage on it.
Table of Contents
- 1 What Is A Transferable Mortgage?
- 2 How Do You Transfer A House With A Mortgage?
- 3 Transferring Ownership Of A House To A Family Member
- 4 Transfer Of Mortgage
- 5 Conclusion
What Is A Transferable Mortgage?
A transferable mortgage like the name suggests 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 of the mortgage can handover 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. In case any issue arises, the lender will contact the new mortgage owner to resolve it.
How Do You Transfer A House With A Mortgage?
Selling a house with a mortgage on it may be a tad bit cumbersome than selling one without a mortgage. Usually, homeowners who feel they might default on the loan and face foreclosure look to sell their homes with the mortgage still on it. However, transferring ownership of a house with a mortgage may be very difficult in some cases.
Have An Assumable Mortgage
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 as well. Even with an assumable mortgage, transferring the mortgage to another person has to be approved by the lender.
The lender will want to make sure that the new owner of the loan 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 eligibility criteria of the lender, 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 included in them 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 Veteran’s 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.
Unofficial Transfer Of Mortgage
Unofficial transfers are not only risky they are generally considered illegal as well. An unofficial transfer of mortgage takes place between the buyer and seller of the property. If the buyer is denied a transfer of mortgage by the lender, the buyer and seller can come to an understanding amongst 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. 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 he also does not own the house anymore. In case of a foreclosure, if the house sells for less than the loan amount, then 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 will have to pay off the remaining mortgage to the lender as soon as you sell the house. But, like other rules, there are exceptions to this rule as well. 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. Keep in mind that transferring ownership of a house to your child does not equal transferring the mortgage to them as well. You may still be left with the entire responsibility to pay off the mortgage.
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. In simple words, your child gets ownership of 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 out of 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 clause or the accelerated clause. These conditions apply when transferring ownership to:
- A surviving joint tenant when the other one dies
- The spouse or child of the borrower
- 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 protections provided by the FDIC.
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 market value of the property 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 your attorney to transfer the mortgage as well 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 that you name in the deed after you pass away without having to go through the legal process of verifying a will that can take weeks, if not months. It makes handling your legal matters a lot faster and efficient for your already 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 currently 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 name to the title deed when you are still alive. With your child’s name on the title, they will be a joint owner in the house and will be responsible along with you to pay off the mortgage. This is a very easy 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 Of Mortgage
Transfer of mortgage is only possible if your mortgage is an assumable or transferrable mortgage. The lender will run an eligibility check on the new borrower of the loan. You can transfer mortgage to child by adding their name to your property’s title deed or to 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.
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.