Can You Sell Your House & Keep the Mortgage?

Mortgages—can’t wait to get rid of them. But is that always true? There are valid reasons to hold onto an existing mortgage, particularly if you signed it during a time with lower interest rates than at present. 

Many people wonder in this case, can I sell my house and keep my mortgage, and can I keep my mortgage rate if I move?

If you’re ready to make a move to a new home or ditch homeownership responsibilities but still find your home loan valuable, can you sell your house and keep the mortgage? In certain circumstances, the answer is yes. 

Introduction to Selling Your House While Keeping the Mortgage

Lending is always a type of gambling. Lenders give you a sum of cash upfront in the hope that you’ll pay them back over time. If you can put up collateral that offers a backup plan for those payments, then it’s a safer bet for the lender.

As a homeowner, you can secure a mortgage at an interest rate lower than a personal loan or a credit card because your house acts as collateral. If you can’t pay back the loan, the mortgage lender can seize the property.

Logically, that means you have to either retain ownership of the property or pay off your mortgage. If you sell the property and later default on the loan, the lender no longer has recourse. 

But even though the answer to “can I keep my outstanding mortgage if I sell my house” is usually “no,” there are a few ways to get around this: 

1. Seller financing (AKA owner financing, creative financing, seller carryback, subject to mortgage, or purchase money mortgage), subject to due clause and lender limitations

2. Federally protected actions that allow you some leeway to transfer a property and hold onto your existing mortgage

Seller Financing

Ready to become a DIY bank and act as a lender to a buyer while keeping your mortgage? In most arrangements, the buyer makes monthly loan payments to you, which you then use to pay your mortgage payments. 

While you have a contract in place with the buyer, you can hold onto the title so that your property doesn’t actually transfer hands until the sale is complete (at which point you’ll have paid off your mortgage). 

There are multiple variations on seller financing, with arrangements including: 

• Holding mortgage
• All-inclusive trust deed (AITD), wraparound mortgage, or overriding mortgage
• Contract for deed or installment land contract with equitable title 
• Second or junior mortgage on top of buyer’s partial primary mortgage with a lender
• Rent-to-own or lease-option agreement
• Lease-purchase agreement

Reasons to Keep Your Mortgage and Offer Seller Financing

Does your mortgage have a lower interest rate than currently available? You might want to hold onto it after a property sale in order to: 

• Boost your cash flow while continuing to leverage a low-interest loan
• Get a cash injection by collecting a down payment 
• Profit by extending financing to a buyer a few points above your mortgage rate
• Attract buyers who can’t afford a conventional mortgage at current interest rates
• Sell to a buyer who’s unable to qualify for a loan with a traditional lender

You could also consider nonconventional seller financing as a way to attract a buyer or sweeten a deal if you’re having a hard time selling or need to make a quick sale.

Understanding the "Due on Sale" Clause

Does your mortgage contract have a due-on-sale clause? If it’s a conventional mortgage, then chances are extremely high that you do. Government-backed loans (FHA, VA, and USDA) are typically the only contracts that don’t include it. 

What Is the "Due on Sale" Clause?

Also known as an alienation clause, “due on sale” refers to a clause that appears in most mortgage contracts. It means that the lender has the legal right to demand immediate payment in full of the loan principal and interest due if the property is sold or transferred. 

The function of due on sale clauses are to: 

• Ensure the borrower will repay the funds
• Require lender notification before transferring the mortgage to someone else
• Prevent a new buyer from assuming the mortgage instead of qualifying for their own
• Trigger closing-day settlement of the mortgage (when the proceeds are available)

Note, the demand for “immediate” payment doesn’t mean within the hour—lenders typically mail a demand letter that provides a deadline in the near future, often 35 days, with a few options to correct the situation.¹

When Is the "Due on Sale" Clause Triggered?

In short, your mortgage becomes due once you alter your current state of ownership. A due on sale clause is typically triggered: 

• If the house is sold by any means to a new owner
• If the title is transferred to a business entity or individual other than spouse or child
• Even if there is a partial sale of the owner/borrower’s interest in the property
• Whether the sale or transfer is voluntary or involuntary

Depending on contract language and state law, the clause may or may not be triggered if a spouse or other individual is added to the deed (without removing the current owner).

What Transfers Do Not Trigger the Due on Sale Clause?

Since the majority of real estate law is at the state level, there are differences in the exceptions or details of how the clause is triggered or enforced. After widespread disagreement and some states thwarting them, Congress passed the Garn-St. Germain Depository Institutions Act in 1982 which² 

• Protects the enforceability of due on sale (alienation) clauses at a federal level
• Identifies exceptions to enforceability
• Preempts state laws on due on sale clauses that conflict with this act

Under the Garn-St. Germain Act’s exceptions list, the due on sale clause cannot be triggered in these circumstances:

• Ownership is transferred among family members as part of a divorce or legal separation
• Ownership is transferred to a spouse or child during the owner/borrower’s lifetime
• The title is transferred into or through a living trust
• The borrower dies and the property is transferred to a joint owner 
• The borrower dies and the property is bequeathed to a relative
• The owner obtains secondary financing against home equity 
• The clause is not included in the mortgage terms contract

How It Affects Selling Your Home

If your outstanding mortgage contract contains a due on sale clause, then it’s not assumable by anyone else. This is one of the common mistakes to avoid when selling a home. You’ll need to either pay off your mortgage upon sale or hold onto the title and consider a seller financing arrangement that does not trigger the due on sale clause. 

Assumable Mortgages

An assumable mortgage refers to a mortgage contract that can be transferred and taken up by a new property owner—that is, it does not contain a standard due on sale clause. Assumable mortgages are generally limited to: 

• Government-backed mortgages (FHA, VA, USDA)
• Some conventional adjustable rate mortgages (ARMs) with bank’s approval
• Rare 40- and 50-year mortgages that originated in the 1970s to early 1980s²
• Some seller financed or otherwise nonconforming, unconventional contracts

The other possibility is lender approval. While most mortgage contracts contain a due on sale clause that prevents their assumption or transfer, lenders can waive or choose not to activate it. You’ll have a bigger chance of lender compliance if you borrowed from a credit union or community bank with a member-first mission vs. profit motive. 

With an assumable mortgage, you actually keep your mortgage, but you can benefit from its value by passing it along to a buyer who will take it over fully. 

Home Sale-Leaseback: An Alternative to Retaining Your Mortgage

In place of risky seller financing or a drawn-out traditional sale, homeowners can also opt for a residential sale-leaseback (SLB). An SLB allows you to: 

• Cash out your equity debt-free
• Pay off your current mortgage balance and regain your total borrowing power
• Fund a new home at your leisure 
• Remain in your current home as a tenant and move on your schedule

You sell your property and, at closing, sign a rental agreement for your home with the option to remain as long as you pay rent and comply with the lease. Instead of mortgage and homeownership responsibilities, a sale-leaseback frees you from the cost and headaches of: 

• Property tax
• Homeowners insurance
• Major repairs and maintenance

Key Considerations Before Making a Decision

You’ll need to do some legwork before making a decision. Start by finding out if your mortgage term or contract has a due on sale clause. If it does, can your sale plan leverage any of the Garn-St. Germain Act exceptions? If not, consider whether an assumable mortgage offer will meet your goals. 

If you’re considering the risky world of seller financing, consult a real estate lawyer who specializes in it, review your situation, and get up to speed on relevant state real estate regulations. You’ll need to evaluate how seller financing could: 

• Affect your cash flow
• Limit further borrowing capacity
• Heighten your risk of equity loss or property damage

In the world of home selling, there are many routes you could take. Know what is available to you — maybe your situation is well suited for a wraparound mortgage. Investigate your options. Before you commit to nonconventional financing, find out if a sale-leaseback program is a better choice for your needs and financial situation. Call (314) 353-9757 and one of our Truehold Advisors will reach out to review the process and answer your questions.

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Sources: 

1. Pace Morby [LinkedIn page]. Avoid Disaster: Mastering the Due-On-Sale Clause in Real Estate! https://www.linkedin.com/pulse/avoid-disaster-mastering-do-on-sale-clause-real-estate-pace-morby-7izhc/‍
2. Bankrate. What is an alienation clause? https://www.bankrate.com/mortgages/alienation-clause/