By Steve Tytler
Question: My partner and I live in a home that still has a mortgage. We would like to complete a quitclaim deed transferring all of our interests in the property to our sister. We will continue to live in the house for now and continue to pay the mortgage and property taxes. Should we be aware of any particular requirements relative to this proposed action? Any information you can provide will be greatly appreciated.
Answer: This may seem like a simple transaction but it is actually fairly complicated.
Fist of all, I assume you realize that by transferring your ownership interest in the property using a quitclaim deed, you are giving up your ownership in the property but not your responsibility for the mortgage. Therefore, your sister has all the benefits of property ownership, but without the liability for the mortgage.
I’m not sure why you want to do this, but this puts you in a very weak financial position. It would be better if you transferred the title to the property and the mortgage liability as well. There are two ways you could do this:
1) Transfer the title using a quitclaim deed as you have planned and have your sister refinance the mortgage in her name. 2) “Sell” the house to your sister and she could get a purchase loan for the property. I’ll go over the pros and cons of each method below.
If you use the quitclaim transfer, your sister must be on title for at least 6 months before she would be eligible to refinance the mortgage in her own name. Of course, this assumes that she has sufficient income and credit to qualify for a new mortgage. The advantage of this transfer method is that it is relatively easy and the only drawback is that your sister would have to wait six months to get a new mortgage, leaving you on the hook for the current mortgage during that period.
If you “sell” the house to your sister, she could take title and assume full responsibility for the mortgage at the same time. Again, this assumes she can qualify for a mortgage amount sufficient to buy the home. If you gift her 20 percent of the equity in the house, she would not need to come up with a down payment. If you don’t have 20 percent equity to gift to her, she would have to come up with at least a 5 percent down payment plus the closing costs for the loan. The advantage of this transfer method is that it is very “clean” from your perspective because your sister would take title and mortgage responsibility at the same time. The downside is that she may have to come up with a down payment to buy the home from you.
If your sister does not get a new mortgage by using either the refinance or purchase methods described above, you would remain liable for the mortgage payments and you are in danger of triggering the “Due on Sale” clause of your mortgage. All loan documents include a clause that gives the lender the right to demand full payment for the balance due on a mortgage if the property is sold or the ownership interest is transferred to another party. So if your mortgage holder finds out that you have transferred title of the house to your sister using a quitclaim deed, they could demand that you pay off the entire balance of the mortgage in full. In reality, they may not find out about the title transfer if you continue to make your mortgage payments on time each month, but that is the financial risk that you take.
Finally, if you are going to live in the house after transferring title to your sister, you should have a written lease or monthly rental agreement specifically stating how much rent you will pay each month (if any) and what repairs and maintenance expense will be paid by you and what will be paid by her. This should be treated as a business transaction with your sister acting as a landlord and you as the tenant to keep everything legal.
You have a lot of things to consider before transferring title to your house, I hope this helps. You should also contact an attorney and/or accountant for professional advice.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at business@heraldnet.com.
