When you sell your house, you can either use the proceeds to pay off your mortgage, or ask the buyer to "assume" it -- mortgage-speak for taking over the payments. Assumption is a great deal if rates have risen since you bought the house: The buyer gets a mortgage at your lower rate, and shares the savings by offering you a higher price.
Assumption is a good deal for you and your buyer but not such a good deal for the lender: Instead of a new loan at current rates, the bank is stuck with your old, less-profitable mortgage. To prevent that, many mortgages come with due-on-sale clauses that allow the lender to demand the balance of the mortgage when you sell. Some lenders will let the buyer assume the mortgage at current interest rates, which is still a good deal: If you've been paying for several years, more of each payment goes to principal than if the buyer started over from scratch.
If you bought your house with a Federal Housing Administration-guaranteed loan, your lender has to let qualified buyers assume the mortgage. To qualify, the buyer has to submit to FHA and lender credit reviews, just as she would for a new mortgage. If your buyer is interested in your home as an investment property, that also disqualifies her. You have to qualify too, by showing you've been living in the house as long as you've had the mortgage.
The 1982 Garn-St.Germain Depository Institutions Act makes certain mortgages assumable even if the contract has a due-on-sale clause. For example, if you're going through a divorce and agree to sell the property to your spouse, he can assume the mortgage. If you transfer the property to a living trust with yourself as the trust beneficiary, the trust can assume the mortgage. The act lists several other circumstances, such as inheriting property from a deceased owner, that make mortgages assumable.
Your lender may insist that you have to pay the mortgage when you sell, but don't take his word for it. Check whether your contract has a due-on-sale clause — if it doesn't, you can forge ahead. If you can't get the go-ahead for an assumption, one option is to have the buyer take out a "wrap around" mortgage. The buyer makes monthly payments to you that are larger than your current mortgage, which you continue to pay. This is risky as you're the one on the hook with your lender if the buyer stops paying.
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- Can a Person Inherit a Mortgage?
- Implications of Assuming a Mortgage