How Does Changing the Deed Affect the Mortgage?

Written by phil m. fowler
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How Does Changing the Deed Affect the Mortgage?
Changing your house deed could result in foreclosure. (Stockbyte/Stockbyte/Getty Images)

A mortgage creates a lien on the title to your house --- until the mortgage has been fully paid off, that lien remains attached, no matter what you do to the title. Changing the deed doesn't remove or reduce the mortgage lien, but it can cause potential problems if you change the deed without the mortgage lender's pre-approval.

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Voluntary Lien

A mortgage loan creates a voluntary lien on your house in favour of the mortgage lender. When you accept borrowed money from the lender, you agree that the lender will have a lien on your property to secure payment of the loan. If you default on repaying your loan, then the lender can take your property as security. The mortgage lien remains attached to your property until your lender formally releases the lien by recording a legal document on your property title. Generally, the lender only does that after receiving full repayment of the mortgage loan.

Property Deed

Your deed is your written evidence of title to your house. The person named on the most recent deed is considered the current legal owner of the house. Changing the deed changes the ownership of the house.

Due on Sale Clause

Nearly every standard type of mortgage loan in the United States contains a due on sale clause, which provides that the lender can demand immediate repayment of the full outstanding balance on the loan if the borrower is no longer the record owner of the property. In other words, if you sell your house without paying off your mortgage, the due on sale clause allows the lender to immediately foreclose on the house. Any change in the deed to your house can trigger the due on sale clause. Even if you simply add your spouse to the deed, or transfer title from yourself to your spouse, this can trigger the due on sale clause.

Exceptions

Federal law provides one broad exception relating to foreclosure on due on sale clauses: Under federal law, a change in the deed simply to accommodate the creation of a living trust in favour of the original borrower under the mortgage loan doesn't constitute a violation of the due on sale clause. Therefore, you can generally change the deed by transferring the house to a trust. Similarly, even though changing the deed to add a new co-owner to the title technically violates the due on sale clause, mortgage lenders usually ignore these transactions as long as the borrower remains a co-owner named on the deed. Finally, a mortgage lender can always give written permission for the borrower to change the deed in a specific way.

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