For instance, you are planning to sell your house; therefore, instead of applying for a new loan, you will just transfer the mortgage to the new owner. However, is this even possible? The answer is, “IT DEPENDS” since in the first place, when you sell your house, the buyer should get his/her own mortgage, and then you will pay yours maybe from the proceeds of your house sale.
However, there are few exceptions to the rule, which you may consider when you are planning to sell your house, and then transfer the mortgage as well.
How to Transfer a Mortgage?
As a general rule, most loans are non-transferable and the reason for that is they have the so-called “due on sale clause”, which means it is a provision in the contract that mandates the lender to pay in full upon the sale or conveyance of partial or full interest of the property. Therefore, it means that once a property is sold, the entirety of the loan comes due.
Luckily, there are some loans that are created without the due on sale clause; therefore, these loans can be transferred from the owner to buyer, and they are called as “assumable mortgage”
What is an Assumable Mortgage?
Assumable mortgage is a kind of financial arrangement wherein the outstanding mortgage and its terms can be transferred from the owner to its buyer. If this happens, the homebuyer will take the current principal balance, the repayment period, any interest rate, and other contractual terms of the current owner’s mortgage.
Three Types of Assumable Loans
1. Veterans Administration (VA) Loan
This is a mortgage loan offered through the Department of Veterans Affairs program. They are available only for active and veteran service personnel and to their families.
VA loan terms
The VA loan has more generous terms such as the following:
- No down payment (unless required by the lender)
- No mortgage insurance
- Limited closing cost and may be paid by the seller
- No prepayment penalties
- Help borrowers avoid default
2. Federal Housing Administration (FHA) Loan
This mortgage is issued by an FHA-approved lender such as banks, which is designed for low-to-moderate-income borrowers, who have at least a credit score of 580 to qualify.
3. United States Department of Agriculture (USDA) Loan
These are special mortgages designed for low-to-moderate-income borrowers, which are guaranteed by the US Department of Agriculture under its USDA Rural Development Guaranteed Housing Loan Program.
You have learned the three types of assumable mortgages; however, keep in mind that they are not widely available unless you are eligible either with VA loan or FHA loan. Even those conventional mortgages are rarely assumable.
That is why lenders issue a due on sale clause on loans since they will not benefit whether you transfer the mortgage or not, therefore, they do not approve transfers. However, as the saying goes, “In every rule, there is an exception”, you may still transfer a loan even with a due on sale clause provision, through the following situations.
Situations Where Transfering of Mortgage is Allowed
Here is a list of the most common exemptions:
- Loan transfer during divorce or separation wherein the ex-spouse can transfer the loan to another if they still continue to live in the house
- Loan transfer to a living trust, if you are the beneficiary
- Loan transfer to a relative (if the borrower died)
- Loan transfer from parents to children
However, if you are not suited with the exceptions listed above and your loan is not assumable, what else can you do? Well, refinancing the loan is the least thing you can do.
What is Refinancing?
Refinancing a mortgage means you will pay the existing loan and will replace it with a new one. The new loan should have better financing terms or features that will help you in improving your finances.
How refinancing works in this situation is through the new homeowner who will apply for a new loan, and then he/she will use that loan to pay the outstanding balance of the mortgage. However, you must coordinate with the new lender to remove liens from the loan. Hence, this is the most possible way to get the job done.
On the other hand, aside from selling your house, there are some situations, where you just want your child to take over your house and the mortgage. But, is this possible?
Can Parents Transfer a Mortgage to a Child and Why Would You Do That?
Parents usually give their home as an inheritance gift to their adult child. However, if the house has an existing mortgage, can your child still be able to take over the house and handle the outstanding balance of the loan?
The answer to that is yes.
There are a lot of reasons why you may decide to take over your parent’s mortgage. However, the main reason I think is that your parents still want to live in the family house.
Some of the reasons might include the following:
1. They are Suffering Financial Hardship
This may be due from certain life events such as the death of a spouse or your parent having an injury that compromises their career, which can reduce the household income to pay the remaining mortgage.
2. They are Reaching the Retirement Age
Maybe your parents already refinanced; however, they put it into investments, buy property, or go on holiday trips, which hinders their capability to finish paying the mortgage until they reach retirement.
3. They are Living Overseas
Maybe your parents are living abroad or they travel most of the time; that is why they ask you to take over the house instead.
How to Take Over your Parent’s Mortgage?
There are a number of ways you may consider to help your parents with the mortgage without compromising the interest in the property. However, it is the best to seek professional help from a mortgage broker, so that you know what to do. Otherwise, here are some ways you may do:
1. Using a Quitclaim Deeds
Quitclaims are relatively useful when parents want to give their home to their children since they are relatively quick and maybe used to transfer property ownership between the parents and the children. Therefore, you may ask your parents to fill out a quitclaim deed form, have it notarized and recorded at the Registry of Deeds.
Unfortunately, quitclaim deeds do not eliminate remaining mortgage loans on property. Therefore, it cannot be used to present to banks; but, can be an additional document.
2. Ask your Parents to Add you to the Mortgage Title
The solicitor may actually draft an informal agreement to add your name registered in the mortgage title; however, your interest in the property may not be protected since you are not the legal owner of the house.
Basically, you are just taking part of the responsibility for the mortgage, but you are not legally entitled yet to the property. That is why consider this decision you are about to make with your parents because this gives a gap to family ties.
Alternatively, you may need to submit a new home loan application, for the joint ownership of the property together with your mom and dad. This time you will be liable for stamp duty for either way: change the property title to include you or transfer the mortgage title.
If this happens, you are now liable in the event when your parents can no longer fulfill their mortgage repayments, for example, the death of your parents.
3. Consider Co-signing
If you are mortgage-qualified, you can just buy your parent’s house equal to its mortgage balance. However, if you are not qualified for a mortgage to buy your parent’s mortgage house, you may tell your parents to consider cosigning. But, how does a cosigner work in a mortgage?
Well, a cosigner is someone that can be added to the mortgage application and other loan documents, wherein he/she may be responsible for the loan, but do not have rights to the property.
That is why parents took the advantage of cosigning a mortgage with their child because it helps them to build equity. For example, it gives them a good credit score by just paying the mortgage every month, thus giving your child the edge to refinance the loan that you cosigned with them. This gives them the right to become co-owners of your home.
What Happens when Both of your Parents Pass Away
Unfortunately, if your parents die without finishing the existing mortgage balance, someone will be responsible for dividing their assets and properties according to their will or according to the terms of your parent’s trust.
During this time, the trustee or the executor of your parent’s estate will use the estate’s money to finish off the remaining mortgage payments.
However, if you have the right with the property, for example, you are included in the mortgage title or you are a cosigner on the mortgage loan, you may have the right to take over the mortgage.
Let the lender know that you are included in the mortgage title (if ever), so that you will not be charged a fee when the property transfers to you, as well for assuming the mortgage.
You may also ask professional advice from mortgage brokers so that you will know what is the rightful thing to do.