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Escape Foreclosure--Transfer Your Home Mortgage Loan
If you’re searching for a way to escape foreclosure and keep your home, transferring your mortgage to another individual may not be for you. If, however, you are willing to give up ownership of the property merely to avoid a damaging foreclosure or short sale on your credit report, you may consider transferring your mortgage loan to someone else.
How Transferring Your Mortgage Works
When you transfer a mortgage, you pass the responsibility for making the mortgage payments to someone else. This allows you to walk away from a home lend you can no longer afford, secure in the knowledge that the loan is being paid by the new homeowner. There is no “sale” process and there is no official closing.
Assuming a Home Loan Benefits the "Buyer"
Who would want to take over your home loan? Plenty of people--especially if you’ve built equity in the property. The new homeowner benefits from your equity, since he or she is essentially getting a piece of property at a considerable discount.
In addition, the buyer doesn’t have to worry about paying closing costs or other fees to secure his or her own mortgage loan and formally purchase your home. If interest rates have risen since you originally bought your home or the buyer has less than perfect credit, assuming a mortgage through a mortgage transfer agreement may be a much wiser financial decision than attempting to buy a new home outright.
Mortgage Lenders and the Due on Sale Clause
Needless to say, mortgage companies don’t want borrowers transferring their mortgage loans because it causes them to miss out on the loan origination fees and various other lending fees they could have charged the buyer. In addition, mortgage companies profit from being able to charge individuals a higher interest rate. Therefore, they don’t want to allow a consumer to merely take over the responsibility for another individual’s mortgage loan.
When you originally applied for your mortgage loan, your lender conducted a credit check, closely scrutinized your income and probably required you to contribute a down payment to the loan to demonstrate your good faith in repaying it. A lender has the opportunity to do none of these things during a mortgage transfer, and thus is placed at a much higher risk of losing money, since the new buyer could default on the mortgage at any time.
Because of the higher risk involved with mortgage transfers, the majority of mortgage lenders include “due on sale” clauses in their mortgage contracts. The due on sale clause prevents borrowers from later transferring their mortgage loans to another person without paying off the loan in full. Should the borrower transfer his or her loan on the sly, the mortgage company reserves the right to sue the individual for the full balance owed on the mortgage.
Getting Around the Due on Sale Clause
Just because your mortgage contains a due on sale clause, that doesn’t mean that it isn’t transferable--even if your mortgage lender doesn’t want you to know that.
The National Housing Act of 1934 contains a nifty little provision that applies federally. Thus, homeowners in all states can take advantage of it. This provision allows for the mortgage transfer of any property to an immediate family member--regardless of what your mortgage company may have to say about it. Therefore, if your child, parent or spouse is willing to take on the legal responsibility for your mortgage, they can do so without activating the due on sale clause.
FHA and VA Mortgage Loans
If you happen to have an FHA loan, your loan may be transferable to people other than your mortgage lender. Many FHA loans contain clauses stating that the original homeowner reserves the right to transfer his or her home loan provided that the lender has an opportunity to review and approve the buyer. Thus, as long as the buyer meets the lender’s income and credit qualifications, he or she doesn’t have to pay a higher interest rate or any additional lending fees to assume your mortgage.
Not all FHA loans are assumable. VA loans, however, are. The VA allows military members who received loans under this program to freely transfer their mortgages whenever they see fit. The VA also requires potential buyers to submit credit and income information for review before they’ll allow you to escape foreclosure by transferring your mortgage loan.