Giving Up Ownership of Real Estate When You’re Still on the Mortgage

Don't get locked out of the house while stuck in the mortgage

It’s every homeowner’s nightmare scenario: you get a phone call from a mortgage company, telling you your home is in foreclosure and that you must pay now or face an avalanche of debt and legal actions. But you signed the house over to someone else months or even years ago! How does something like this happen?

This scenario is more common than you might think. Real estate lawyers routinely have to untangle the complex knots of ownership transfers gone awry, and the process can be both expensive and psychologically draining. When you buy, sell, or transfer a home, you must complete two separate processes. The first part is easier: transferring ownership to someone else. The second step is making sure that your name is cleared from any mortgage, equity line, or other debts secured by the real estate, even if you are transferring the property to a family member or are following a court order in a divorce settlement. Ownership and responsibility for the mortgage are two completely different things, so you can still be on the mortgage for a house you don’t own.

Why Relinquishing Ownership While Still on the Mortgage is a Dangerous Idea

If you’ve suddenly come into money, want to help a child navigate the choppy waters of early adulthood, or are so eager to finalize your divorce that you’ll give up just about anything, you might find yourself signing over ownership to someone else. This is almost always a bad idea. To fully protect your rights, you need to go through the complete sale, purchase, and mortgage payoff process, since you’ll be on the hook for every penny of your mortgage until you either pay it off or are otherwise released from your payment obligations.

So what happens if you sign over ownership, but remain on the mortgage? Sometimes, nothing. If the other party is responsible and continues to pay the mortgage, you won’t hear a word. Having a timely paid mortgage might even offer you a slight credit boost. This tiny benefit is not worth the cascade of horrors that await you the first time the new owner misses a payment, though. Some of the consequences of this outcome include:

  • Dings to your credit. Even if the other party eventually pays a missed payment, your credit could take a hit that ranges from short and minor, to long-lasting and catastrophic.
  • Foreclosure on the home. Though this won’t immediately affect your living arrangements, the lender might still come after you for the money. In the worst-case scenario, you could end up paying hundreds of thousands of dollars to get out of debt on a home you weren’t even living in.
  • Wage garnishments if you are sued for the missing money and lose.

When Might Homeowners Do This?

For something to be such a fundamentally bad idea that people routinely go through with anyway, there have to be strong motivating factors. People who are overwhelmed, facing litigation, or going through major life transitions are vulnerable to poor financial decision-making. Some of the most common circumstances under which people transfer ownership without removing themselves from the mortgage include:

  • After a divorce or separation. Some newly divorced spouses willingly transfer ownership of their old home to their former spouse. Others are ordered to do so by a court; in the latter scenario, people sometimes neglect to remove themselves from the mortgage. If the divorce is a contentious one, the former partner may deliberately avoid making payments to further “punish” his or her spouse.
  • When transferring a property to a child or family member. Maybe you want to help them out by paying the mortgage. Perhaps they don’t have sufficient credit to take out a mortgage of their own. Or maybe you simply neglect to consider the financial ramifications of your decision.
  • Under a court order. The most common scenario under which this happens is after a divorce, but in a limited number of other cases—notably will and property disputes—you might be ordered to transfer ownership, even as the court order remains silent on the issue of who remains responsible for the mortgage.

Does the Lender Have to Release You From the Mortgage?

As already outlined, ownership is a completely separate matter from your mortgage. The mortgage company enables you to own your house by paying for it, but your obligation to the mortgage company does not end when you cease living in the home. There are only a limited number of scenarios in which a mortgage company will be required to release you from your mortgage. Those include:

  • A court order requiring the mortgage company to do so. This usually only occurs in the context of a divorce, or when you file suit directly against the mortgage company.
  • Language in your contract with your lender requiring the lender to release you from the mortgage when ownership changes. These clauses are exceedingly rare, and typically only happen if you finance your home through a private individual.
  • If the other party agrees to assume your mortgage, and the lender issues a contract allowing him or her to assume the mortgage.

Aside from these circumstances, the mortgage company is under no obligation to release you from your mortgage, and you should not assume that they will. You do, though, have some options to protect your financial interests when you transfer ownership to someone else. Those options include:

  • Requiring the transferee to take out a loan to pay off your mortgage, thereby releasing you of any further obligation to the lender.
  • Asking the mortgage company if they will refinance your mortgage and remove your name. This option works best if you share the mortgage with someone else. Typically, lenders only agree to this if the other party’s credit and income are sufficient to cover the mortgage alone.
  • Getting the other party to agree to indemnify you and hold you harmless; as noted above, this is far from a risk-free option.
  • Becoming a lender to the person to whom you have transferred the property. Under this arrangement, the transferee would make monthly payments to you. If payments aren’t timely made, you can repossess the house. You remain responsible for forwarding payments to your lender to cover your mortgage, of course, and you’ll need the help of a competent real estate lawyer to draw up the contract outlining this arrangement. Never enter into such a complicated arrangement without a contract!

Troubleshooting Common Problems

Most people researching the issues of mortgage liability and home ownership have already made the mistake of transferring ownership without transferring the mortgage. If this sounds familiar, hire a lawyer to help you sort through the mess. It’s much easier to address these issues before they occur than try to remedy them after they’ve affected your life and finances.

If a lender is after you for a house you no longer own, only your lawyer can tell you which options are appropriate in your situation. You might be able to seek a court order requiring the lender to release you from the mortgage, or a refinance might still be possible. If the home is already in foreclosure, your only choices are to pay down the loan, or to work out a deal with the lender. This does not prevent you from going after the other party for failing to pay the mortgage, but he or she might not have the money, even if you win your lawsuit.

The lesson here is that it’s always best to hammer out the details of these arrangements before you land yourself in financial peril. Debts to home lenders can escalate out of control fast, and once your lender initiates the foreclosure process, the entire balance becomes due and payable. That’s an amount few people can afford to pay upfront, so take the risk of transferring ownership without transferring your mortgage very seriously.