Can You Transfer The Ownership Of A Property That Has A Mortgage?All your Questions answered and Step by Step Guide

Patrick Louie

Not all things in life go as planned.

And that saying still applies to real estate properties and mortgages.

Imagine that you got your first home. But, in order to purchase your first home, you had to enter into a mortgage.

Along the way, for whatever reason, you had to sell your first home.

Or you had to transfer your property, it could be either.

The question now is, are you allowed to do so?

Can you transfer the ownership of a property with a mortgage?

If a property still has a mortgage, it means that the corresponding loan is not yet fully paid back.

This means that the lender still has the right to take away the property should the borrower default on the loan.

Given this circumstance, can you transfer the ownership of a property with a mortgage without any legal repercussions?

In this article, we will find out if we can transfer the ownership of mortgaged property without any consequences.

And if we can, how can we transfer such ownership?

Is there a way that we can transfer a mortgaged property without requiring the transferee to pay off the existing mortgages?

We’ll try to answer these questions as we go along with the article.

What is a Mortgage?

Can You Transfer The Ownership Of A Property That Has A Mortgage

Before we discuss whether we can or cannot transfer the ownership of a mortgaged property, let’s have a quick refresher on what a mortgage is.

A mortgage is a type of loan that an individual or company usually enters into to purchase or maintain a real estate property such as a home, land, rental property, etc.

A mortgage requires collateral for security, typically the property that the loan will finance.

There is also an agreement between the borrower and lender that should the former default on his/her payment, the latter has the right to take away the property (which is the collateral).

A mortgage will typically have strict requirements.

These usually include having a good to excellent credit score, sufficient cash reserve, proof of income, etc.

There are also other avenues other than conventional loans to secure a mortgage such as hard money loans, blanket loans, portfolio loans, and cash-out refinancing.

You need to stay on top of your mortgage/s to minimize the risk of losing your property.

This is even more important if you have more than two mortgages.

Can You Transfer the Ownership of a Property With a Mortgage?

The short answer is yes.

You can transfer the ownership of a property with a mortgage even if the corresponding loan isn’t fully paid yet.

However, that doesn’t mean that all mortgages are freely transferable.

Oftentimes, you will need to have your mortgage lender approve the transfer.

Thus, it usually is at the discretion of the lender.

Typically, a mortgage will have a “due on sale” clause.

This clause not only applies to the sale of the property but also to any other type of transfer of ownership.

This clause means that should the ownership of the mortgaged property be transferred to a new owner, the remaining balance of the loans has to be fully paid.

This usually results in the new owner having to pay the remainder of the loan just to complete the transfer.

In most cases, the new owner will also have to get a new mortgage.

This isn’t that much of an issue if the terms for the new mortgage are as good or even better than those of the old mortgage (e.g. same or lower interest rate).

But if the terms of the new mortgage are worse, the new owner will probably prefer to just assume the existing mortgage.

However, if you have an assumable mortgage, things will be different.

With an assumable mortgage, you can safely say that you can transfer your mortgaged property to a new owner.

The loan doesn’t have to be fully paid.

The new owner doesn’t have to get a new mortgage.

Rather, the new owner assumes the existing mortgage.

Note that there are exceptions to the  “due on sale” clause.

They don’t always kick in given the right circumstances.

Usually, when the transferee of the mortgaged property is a family member, the “due on sale” clause might not apply.

Exceptions to the “Due On Sale” Clause

The FDIC set several rules that disallow lenders from exercising the “due on sale” clause or asking for accelerated payment.

Effectively, transfers under these circumstances are exempt from the “due on sale” clause.

These rules pre-empt or take priority over state laws concerning “due on sale” clauses.

Such transfers of ownership include the following:

  • Transfers due to the death of a joint tenant; in this case, the ownership of the mortgaged property transfers to the surviving joint tenant upon the death of the primary or any other joint owner
  • Transfers to a relative or family member resulting from the death of the borrower
  • A transfer where a child(ren) or spouse becomes an owner (or co-owner) of the property
  • A transfer to an ex-spouse as part of a divorce settlement
  • Transfers into an inter vivos trust that has the borrower or a donee as a beneficiary

There are other circumstances that are exempt from the “due on sale” clause but they do not involve a transfer of ownership.

To know of them, you may click here.

It’s in section 591.5 – limitation on exercise of due-on-sale clauses.

How to Transfer the Ownership of a Mortgaged Property

Unless you have an assumable mortgage, the process of transferring the ownership of mortgaged property will not be easy.

Different lenders will use different procedures as well as require different things.

It can get complicated really quickly, so much so that you may need the help of a real estate attorney.

But if you still plan on proceeding with the transfer, here are some steps that you generally have to take:

Name the person/company who will become the transferee of the ownership of the mortgaged property

The transferee could be a family member, friend, or a stranger (who happens to be buying your mortgaged property).

Determine the terms of the transfer

Ideally, this step should be done with the help of an attorney (though it is optional).

Be sure to carefully lay out the terms to avoid costly mistakes.

Such mistakes could lead to unnecessary taxes, penalties, and other fees.

Fill out a change of ownership form

A change of ownership form may vary from state to state.

Such a form is required to transfer the ownership of any property, mortgaged or not.

Consult with your state to know the requirements that come with the form. If possible, you may want to work with a lawyer for this one.

Choose the right deed and prepare the necessary prepare

We’re almost at the home stretch. There are different deeds that you can choose depending on your state and locality.

These deeds will be proof of a transfer of ownership.

It’s recommended that you work with a lawyer on this, preferably one that specializes in real property transfers.

Have the deed notarized and filed

After finalizing the deed, have it notarized and filed.

This will make the transfer of ownership public and official.

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  1. Cornell Law Review "Transfer of Mortgaged Property" Page 1 - 29. October 18, 2022