A mortgage transfer is defined as a transaction in which the borrower or lender assigns an existing mortgage to another person or entity. If a mortgage can be transferred, it is referred to as “assumable".
Assumable mortgages fade in and out of popularity depending on the current interest rates. During periods in which mortgage rates are high, assumption of an older mortgage with more favorable rates can be tremendously beneficial for the homebuyer. Not only will he or she save thousands of dollars on lender interest charges, but a buyer who assumes a home mortgage can circumvent the closing costs associated with securing a new mortgage loan.
Essentially, mortgage assumption is simply a buyer assuming the mortgage payments and responsibilities of the existing mortgage held by the seller. In a mortgage assumption transaction, the buyer generally pays the seller cash as compensation for the equity already invested in the property. The buyer then assumes ownership of the mortgage and must make mortgage payments for the original monthly amount at the previously fixed rate of interest.
Mortgages secured by the Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) offer a kind of unofficial mortgage assumption option. With either an FHA or VA loan, the mortgage will generally not include any sort of “due on sale” clause, meaning that the loan will not immediately become due if the homeowner sells the home.
Currently, the majority of traditional mortgages cannot be assumed unless they are guaranteed by either the FHA or the VA. If the buyer satisfies the standard requirements of the FHA or VA, he or she can generally assume a seller’s mortgage at the cost of a few hundred dollars. However, if a Due on Sale clause is included in the underwriting, the loan must be repaid immediately, and mortgage assumption is not possible.
Mortgage assumptions come in two versions: Simple and Novation.
When it comes to mortgage assumption, many people within the banking industry criticize this option as the buyer generally receives tremendous benefits, while the seller and lender are left in a somewhat vulnerable position.
In order to counter mortgage assumptions, many lenders include a Due on Sale clause in their mortgage contracts; this regulation specifies that if a seller transfers the property to someone else, the lender can require that the total amount of the original loan be repaid immediately. Mortgage transfers cannot occur under these conditions, as sellers will be forced to repay the loan, and any prospective buyers will need to secure a new mortgage loan to purchase the property.
Inclusion of a Due on Sale clause provides basic protection for lenders. Since mortgage transfer involves a third-party buyer, he or she has no contractual obligations to fulfill to the lender and has not been subject to either a credit check or income verification.
In order to transfer a mortgage, one must first determine whether the mortgage underwriting permits this transaction. If allowed, the lender must verify that the new holder of the mortgage possesses a solid credit history and adequate income to make loan payments on time; a lender will not transfer a mortgage to someone who is less qualified or able to pay off the loan than the current holder. Initiating a transfer of mortgage can be easier if you have an FHA or VA loan though it is still challenging.
While transferring a mortgage under typical circumstances can be quite difficult, certain laws in place allow mortgage assumption under extenuating circumstances, regardless of mortgage type. In cases of death or divorce, borrowers may find mortgage assumption a viable option.
Unfortunately, the guidelines of mortgage transfers do not include any additional extenuating stipulations for transfers to family members; in such circumstances, the mortgage transfer follows the same rules as a typical mortgage assumption. While lenders tend to frown on transferring a mortgage to a family member, it's not uncommon to get it approved for mortgage assumption if they can prove to be more reliable than the original borrower.
Due to the difficulties of transferring a mortgage, some homeowners choose to “unofficially” transfer a loan, usually with a promissory note signed by both parties. However, these unofficial transfers do not hold up legally, since many mortgage contracts expressly forbid this. In these scenarios, the original borrower remains responsible for the monies owed.
Consequently, a better option would be to work with your lender to possibly add another borrower/owner to the mortgage, enabling them to make payments on the loan.
If adding another borrower or owner is impossible, refinancing or modifying your loan may be another helpful option. Furthermore, selling your home allows potential buyers, colleagues, family members or other entities to make up any difference between the home's sale price and the unpaid loan balance.
In addition to transferring a mortgage from one person to another, a mortgage may be transferred between properties if mortgage “portability” is included in the underwriting. Taking out a portable mortgage, however, is typically more expensive than traditional loans.
As previously indicated, a portable mortgage is a mortgage that can be moved from one property to another with the borrower, allowing the borrower to retain his original mortgage instead of having to close it and undergo the loan process once more to acquire a new one. Borrowers who may move in the near future but still wish to purchase a property should consider acquiring a portable mortgage.
Portable mortgages provide several benefits to borrowers. Borrowers with portable mortgages will have some protection against potential mortgage rate increases. In addition, moving a mortgage from one property to the next allows borrowers to circumvent the costs associated with closing one mortgage and opening another.
Portable mortgages have their share of drawbacks as well. For instance, although portable mortgages have fixed interest rates, they typically have higher rates than available for standard fixed-rate loans under the same circumstances. As such, borrowers who do not take advantage of a mortgage’s portability should not acquire this extra feature, as it could very well end up costing more than it saves.
Additionally, portable mortgages should not be acquired if a borrower intends to purchase a second home in a significantly different price range. Furthermore, mortgage portability only includes a single transfer, so borrowers who move more than once would need to secure a new mortgage following the first move.
Due to their complexity, portable mortgages carry strict eligibility restrictions. Typically, only borrowers with specific mortgage types, such as 30-year fixed rate mortgages, can qualify. Moreover, borrowers must have exceptional credit, making portable mortgages a rarely-used option.
If you are interested in transferring your mortgage, be sure to speak with both an attorney and your lender first to find out what the terms and requirements are. Most lenders are willing to do as much as possible to help borrowers stay current on their payments, so make sure to ask them about your options.
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