Sometimes it makes more sense to transfer a mortgage to another person rather than the new borrower taking out a new loan. The time this makes the most sense is when interest rates increase so much that the payment becomes unaffordable. If you currently have a mortgage with a lower rate, the buyer might be able to afford that payment. However, very few loans allow you to transfer your mortgage. The exception to the rule is government-backed loans – both FHA and VA loans are usually assumable.
What Does Assuming a Mortgage Mean?
So what does it mean to assume a mortgage? Unfortunately, you cannot just tell the lender you want to switch the mortgage into another person’s name. Instead, you tell the bank about the desire to exercise the right to assume and then the new borrower must qualify for the loan. You have to think of it in terms of the bank’s liability. They gave you the loan based on your qualifications at the time of origination. The only person they want taking over the loan is someone who is just as qualified to make the payments.
Qualifying for an Assumption
If you have an assumable loan, the new borrower must qualify for the assumption. Basically, this means his credit score and debt ratio must meet the guidelines. Both FHA and VA loans do not have credit scores or debt ratios set in stone, though. There is some leeway. The key is that they balance each other out. For example, if you have a lower credit score, you should also have a lower debt ratio to keep the risk low. If you have a low credit score and a high debt ratio, you would not be very likely to assume the loan. The lender wants someone with the ability to repay the loan, just like the original borrower.
Other Options to Transfer Your Mortgage
Luckily, there are other options to transfer your mortgage. If you have a conventional loan or other program that does not allow assumptions, you can refinance the loan. When you refinance, you can add a person onto your loan, assuming they qualify. You don’t want to bring someone on that has bad credit or a high debt ratio. When you bring this person onto the loan, you can also quit claim him/her onto the deed. They are now part owners of the property. Down the road, the new borrower can refinance again and take you off the loan. Once they quitclaim you off the deed, you no longer own the property. This is the roundabout way to deal with a loan assumption, but it is a way around it.
The Due on Sale Clause
Be careful if you think you can get around the assumption rules. Most loans have what is called the “due on sale” clause. This states that when you transfer the property to someone else, the loan becomes due. This means your term is void and the loan immediately becomes due and payable. There are exceptions to the rule, though:
- If the borrower dies the loan may be transferred
- If the borrower passes the property onto his children
- If there is a divorce and the property changes hands
- If you wish to put the home into a trust
Before you use any of these exceptions, though, you should also consult with an attorney. Assuming a mortgage is nothing to mess around with – if the bank thinks you acted fraudulently, there could be legal consequences.
It is not easy to transfer your mortgage to someone else. Banks really try to avoid it because they do not make any money on the deal. They would rather you pay off your loan and someone else take a new loan than let that person assume it. If you think you have the right to assume a loan, talk to your lender and/or attorney to see what options you have.