Transferring Your Mortgage: What's The Process And Eligibility?

If you're wondering whether your mortgage is transferable, it's important to understand that not all mortgages can be transferred to another person or entity. Most conventional mortgages are not transferable, but some lenders may approve a transfer in specific situations. Transferring a mortgage involves reassigning an existing home loan to another party, who then takes on the financial responsibility of repaying the outstanding loan balance under the original terms and conditions. While transferring a mortgage can have benefits for both the original and new borrower, it is generally a challenging process. To determine if your mortgage is transferable, it's essential to review the terms of your loan and consult with your lender to understand your options and any applicable requirements or restrictions.

Transferring to a family member

Transferring a mortgage to a family member is possible, but it is a complex process that is not without risk. It is important to note that most conventional mortgages are not transferable, and lenders may only approve a transfer in specific situations.

If you are looking to transfer your mortgage and house ownership, either in full or in part, you will need to make a Transfer of Equity. This is a formal process that may involve getting a new loan to pay out the existing one. A Transfer of Equity to a child can be a legitimate way to make long-term inheritance plans. While you won't be completely exempt from tax liability, it can minimise issues and provide a cleaner inheritance upon your death.

There are three main ways to transfer a property with a mortgage to a family member in Australia:

• Gifting: This involves giving a family member a property without any money changing hands, but a legal process is still required. A government document registering the transfer must be obtained, and stamp duty is usually payable on the property.
• Selling: This follows a similar methodology to a standard mortgage, with contracts of sale for both parties to sign. However, you can agree to buy and sell the property for any price, even below market value, which is known as a favourable purchase agreement.
• Unofficial transfers: This option involves the new party sending payments to the original borrower, who then pays the loan. This is not recommended as it has legal and financial risks, and the initial borrower is liable for the debt if the new party stops paying.

It is important to note that transferring a mortgage to a family member is different from acting as a guarantor on their mortgage. Lenders may approve a transfer in certain situations, such as death, divorce, or separation, or when a living trust is involved.

Due-on-sale clause

A due-on-sale clause is a provision in a mortgage or loan agreement that allows lenders to require borrowers to repay their loans if all or part of the property securing the loan is sold or transferred to another party. In other words, it prevents a homeowner from selling their home without first paying off their mortgage debt.

The clause was designed to protect lenders from the risk of a mortgage being transferred to a new owner when interest rates are higher than the rate on the existing mortgage. Without the clause, a new buyer could assume a mortgage with an interest rate below the market rate.

• Divorce or legal separation: If the borrower files for divorce or legal separation, the property may be transferred to the spouse or child without invoking the due-on-sale clause. However, the new owner must occupy the property.
• Inheritance: If a borrower dies, a relative who inherits and occupies the home cannot be forced to pay off the remaining mortgage balance. However, if the heir does not occupy the home, the transfer of title can trigger the clause.
• Joint tenancy: If the borrower entered a joint tenancy agreement when purchasing the house, a lender cannot enforce the due-on-sale clause if the borrower dies. The surviving joint tenant automatically assumes the entire mortgage and can pay it off as initially planned.

Foreclosure avoidance

If you are facing foreclosure, it is important to act quickly and understand your options. Here are some ways to avoid foreclosure:

Contact your lender

As soon as you know you will have trouble paying your mortgage, contact your lender. They may be able to work with you to create a financial plan or agree on other payment arrangements. For example, they may allow a temporary suspension of your payments or a repayment plan to help you catch up. Lenders do not want your house, and they often have options to help borrowers through difficult financial times.

Understand your loan documents

Review your loan documents to understand your rights and responsibilities, as well as those of your lender. Check if your loan contains a "due-on-sale" provision, which states that if the property is transferred to a new owner, the full loan balance becomes due. Also, be aware of any potential scams, such as fake transfer letters, and always verify any changes with your lender.

Seek free or low-cost housing counselling

The U.S. Department of Housing and Urban Development (HUD) offers free or low-cost housing counselling to help you understand your options and negotiate with your lender. Government programs and housing counsellors can provide valuable information about foreclosure prevention and loss mitigation options.

Explore loan modifications

Look into loan modification programs such as the Home Affordable Modification Program (HAMP) or the Second Lien Modification Program (2MP). These programs may be able to provide temporary assistance or offer alternatives to foreclosure.

Consider a short sale or deed-in-lieu

If you are unable to keep up with your mortgage payments, you may be able to sell your home for less than the remaining mortgage balance, known as a short sale. This requires the approval of your lender, who must agree to accept the proceeds and cancel the mortgage. Alternatively, you can explore a deed-in-lieu, where you voluntarily transfer ownership of the property to the lender in exchange for a release from the loan.

Remember, not all mortgages are transferable, and it is essential to understand the terms of your loan and the laws in your state. While avoiding foreclosure is important, also be cautious of scams and only work with reputable organizations.

Lender approval

To obtain lender approval for a mortgage transfer, it is essential to understand the eligibility criteria. Lenders typically assess the financial qualifications of the new borrower, including their credit history and income. They want to ensure that the new borrower is creditworthy and capable of making timely payments. A credit check and income verification are standard requirements to establish the new borrower's financial stability.

Additionally, lenders may consider exceptional circumstances that necessitate a mortgage transfer. For instance, in cases of death, divorce, or separation, lenders might be more amenable to approving a transfer. This is especially relevant when transferring the loan to a spouse, child, or other relative, as lenders may be more accommodating within familial contexts.

It is worth noting that even if your loan is assumable, the lender may not always approve the transfer. For example, the transfer of an FHA loan depends on the loan's status and the new borrower's creditworthiness. A property appraisal may also be required as part of the lender's approval process.

To initiate the process, it is advisable to contact your lender directly and enquire about their specific requirements and procedures for mortgage transfers. Each lender may have slightly different criteria and processes, so it is essential to follow their guidelines closely. Obtaining lender approval for a mortgage transfer can be challenging, but with the right qualifications, circumstances, and lender cooperation, it is achievable in certain situations.

Unofficial transfers

If your mortgage is not transferable, you might consider an unofficial transfer. This is where another person makes the mortgage payments while the loan remains in your name. However, this is not recommended as it is illegal under the terms of most mortgage contracts. You will also still be held financially responsible if the other person stops making payments.

If your mortgage is not transferable, you could also consider other options. For example, the person who wishes to assume the loan could apply for a new mortgage and buy the home from the previous borrower. However, this means dealing with new loan terms. Another option is to add a second borrower to the loan. However, this won't remove the original borrower, so they will remain liable for the debt.

Frequently asked questions