Transfer a Mortgage to a Relative Without Making a Profit

An aging parent may want to keep the family home within the family, rather than sell it.


Certain life circumstances may require a homeowner to give his home to a family member. An aging or sick parent who moves out of his home into assisted living or a nursing home may want to pass his property to adult children, for example. Financial hardship or other needs might also compel a homeowner to give up ownership to his kin without a profit from the transfer. A loan assumption or refinance can be used to transfer a mortgage in such cases.

Refinance and Assumption Basics

A homeowner who wants to pass his mortgaged home to a relative rather than sell it for a profit can save the new owner money with a loan assumption. Loan assumptions involve few fees and allow the new homeowner to keep the previous owner's loan terms, such as the interest rate, remaining loan balance and the remaining repayment term. In a refinance, the new homeowner obtains a new loan and pays off the previous loan. Refinances involve closing costs of 2 percent to 5 percent of the loan balance. It also involves an evaluation of the property and the new homeowner's finances.

Federal Law Protection

A lender may prevent a transfer to a relative when a due-on-sale provision or acceleration clause is part of the original mortgage agreement. They require the homeowner to pay off the loan upon transfer; however, in certain circumstances, federal law allows transfers of ownership and the mortgage despite these clauses. The law, known as Garn-St. Germain, allows the heir or surviving spouse of a homeowner who dies to assume the loan. The protection also applies in divorce, where a co-owner deeds the home to the ex-spouse or offspring of the ex, who will live in the home. The law also covers transfers that occur through inheritance, if the heir is a relative living in the home.

When to Refinance

A refinance might make more sense than a loan assumption if the relative can get a lower interest rate or improve the current loan terms. A refinance that would yield a lower monthly payment might offset the expense of refinancing. A refinance may also prove favorable if the previous loan included risky terms, such as an adjustable interest rate or balloon payment that the new homeowner isn't comfortable with. A refinance may be the only option if the homeowner's lender can enforce a due-on-sale clause or acceleration of the loan repayment upon transfer to a relative.

Opting for Assumption

Older government-backed loans from the Federal Housing Administration and the Department of Veterans Affairs allow loan assumptions without the need for the new homeowner to qualify. The relative doesn't undergo a credit or income check. Assumptions under other loan programs, and more recent government-backed loans, require credit qualifying. As with a refinance, the lender must ensure the new homeowner can afford to take on the loan responsibility. Relatives may not be able to assume a loan if they can't provide sufficient income to support the housing obligation.

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