How To Change the Names on a Loan
When selling a home or moving out, it may be prudent to attempt to transfer the mortgage to the new owner. Rather than applying for a new loan, paying closing costs, and beginning with higher interest rates, the new owner could assume the current payments.
There are loans that can be transferred. Such loans are known as "assumable loans." However, there are few available. Learn more about loan transfers and what you can do if you need to transfer a loan that is not assumable.
• You can "mortgage transfer" to another party if the loan is assumable.
• The new borrowers will be treated as if they were starting a new loan.
You still have options if your mortgage cannot be assumed, even if your lender says no.
Assumable Mortgages
If a loan is "assumable," you're in luck: You can transfer the mortgage to another party. There is nothing in the loan agreement that prohibits you from transferring the loan. However, even mortgages that can be assumed can be difficult to transfer.
In most instances, the prospective borrower must qualify for the loan. The lender will evaluate the borrower's ability to repay the loan based on their credit scores and debt-to-income ratios. The procedure is identical to that of a borrower applying for a brand-new loan.
Note:
The original loan application was approved based on your credit and income. They will not release you unless they can find a replacement borrower who is just as likely to repay.
To complete the transfer of an assumed loan, you must request the modification from your lender. During the process, you will be required to submit applications, verify your income and assets, and pay a fee.
Where To Find the Assumable Mortgage
Unfortunately, there are a limited number of mortgages that can be assumed. Because FHA and VA loans are assumable, you might be in luck if you have one. Rarely can other conventional mortgages be assumed. Instead, lenders utilize a due-on-sale clause, which requires you to repay the loan when you transfer the property's title.
Lenders lose interest payments they would receive on a new loan if they allow a mortgage transfer, so they are typically reluctant to approve transfers. Obtaining a more "mature" loan, with the initial interest payments eliminated, would benefit buyers. Thanks to these same advantages, sellers would be able to sell their home more quickly and perhaps for a higher price.
Assumable Mortgage Rule Exceptions
In some instances, it is possible to transfer a loan with a due-on-sale clause. Transfers between family members are frequently permitted, and your lender can always be more accommodating. The only way to be certain is to ask your lender and have an attorney review your agreement.
Even if lenders say it's impossible, a lawyer can help you determine if your bank is providing accurate information.
Note:
Changing names on a loan has no effect on the loan itself. You will still be required to transfer the title using a quitclaim deed or any other applicable steps.
In certain circumstances, Federal Deposit Insurance Corporation (FDIC) laws prohibit lenders from exercising their option to accelerate payment. Review your eligibility to transfer without an accelerated payment with your attorney. Several of the most common transfers include:
• To a surviving joint tenant when the other dies;
• To the relative after the death of a borrower;
• To the spouse or in case children of a borrower;
• As a result of divorce as well as separation agreements;
• Into an inter vivos trust (living trust), wherever the borrower is a beneficiary.
Unofficial Transfers
If your request is denied, you may be tempted to establish "informal" arrangement. You could, for instance, sell your home, keep the existing mortgage, and have the buyer reimburse you for the mortgage payments.
Nonetheless, there are a few problems with this. Your mortgage agreement probably prohibits this, and if your lender finds out, you could face legal consequences. Moreover, you are still liable for the loan even though you no longer reside in the home.
What could possibly fail?
• If the buyer stops making payments, the loan is in your name, so it remains your responsibility. Your credit reports will reflect the late payments, and creditors will pursue you.
• You could be liable for any deficiency if the property is sold in foreclosure for less than it is worth.
There are other ways to offer seller financing to a prospective buyer, such as permitting a rent-to-own arrangement in which a portion of the rent goes toward a down payment if the renter decides to purchase.
Your Options
If you are unable to transfer a mortgage, you still have options, depending on the circumstances.
Note:
Even if your lender forbids it, death, divorce, and family transfers may give you the right to transfer your mortgage.
Even if you're underwater or unemployed, certain government programs make it easier to deal with the mortgage if you're facing foreclosure. Contact the U.S. Department of Housing and Urban Development (HUD) to determine whether your situation qualifies for assistance.
If you are getting a divorce, you can ask your attorney how to handle all your debts and how to protect yourself if your ex-spouse fails to pay. If you are not on the title but were married to the homeowner and they pass away, a local attorney can help you determine what to do next.
You may transfer your home into a trust, but you should confirm with your estate planning attorney that you will not trigger an acceleration clause.
Refinancing
If a loan cannot be assumed and there is no exception to the due-on-sale clause, refinancing may be your best option. Similar to an assumption, the new borrower must have adequate income and credit to qualify for the loan.
The new homeowner must independently apply for a new loan and use it to pay off the existing mortgage debt. It may require coordination with your lenders to remove liens (unless the new borrower and new lender agree to them) before you can use the property as collateral, but it is a good, clean way to get the job done.
Frequent Requested Information (FAQs)
Can a co-borrower be added to an existing mortgage without refinancing?
To add or remove a borrower from a mortgage, refinancing is necessary. You will be able to add the new co-borrower to the mortgage and deed during the process.
Do assumable mortgages require down payment?
Assumable mortgages necessitate a down payment proportional to the amount owed on the property and its market value. If the home is worth $200,000 and there is $100,000 remaining on the mortgage, the buyer will need to make a down payment to cover the cost.
When Does Transferring a Mortgage Make Sense?
If the terms of the seller's existing mortgage are more favorable than what is currently available on the market, it may be financially advantageous to assume the loan. In an environment of rising interest rates, buyers can obtain better terms by assuming loans originated during periods of low interest rates. It is likely that rising interest rates will continue to make loan assumptions more attractive as they continue to rise.
A loan assumption may also be appropriate after any significant event requiring the transfer of property. This could include divorces, estate planning and inheritances, real estate gifts, and other transactions that are not conducted at arm's length. You may wish to consult with a lawyer to determine whether an assumption is permissible in any of these situations. FHA, USDA, and VA loans typically permit property assumption without an actual sale.
Another advantage of an assumable loan is that it may serve as an incentive for homebuyers, particularly if the existing interest rate and terms are favorable. If you encounter a buyer who is willing to make a substantial cash contribution, you can use this as an added selling point.
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