A property transfer, such as gifting a home or moving it into a trust, can trigger an alienation clause in your mortgage. This clause allows lenders to demand immediate loan repayment, demonstrating how the alienation clause can force you to refinance. While federal law provides exemptions for certain transfers (e.g., to a spouse or for inheritance), others, like transferring to an LLC or adding an unrelated party to the deed, often necessitate a new loan. Understanding these triggers and consulting your lender are crucial to avoid unexpected financial burdens.
This article will walk you through:
- When refinancing is required after a property transfer
- What legal and mortgage clauses play a role
- Exceptions that protect homeowners and heirs
- Steps you should take to avoid costly surprises
- Practical strategies for a smooth refinancing process
Understanding the Basics
What is a Property Transfer?
A property transfer occurs when ownership or a legal interest in a property is moved from one person or entity to another. This can happen in various ways:
- Selling a property
- Gifting it to a family member
- Transferring into a trust or LLC
- Inheritance after death
What is an Alienation (Due-on-Sale) Clause?
An alienation clause, often buried deep in mortgage documents, allows lenders to demand full repayment of the loan if the property is transferred to another party without their approval.
Lenders include this clause to protect against risk—they qualified the original borrower, not the new owner.
When Does a Property Transfer Trigger Refinancing?
Refinancing becomes necessary when a transfer:
- Violates the terms of the current mortgage
- Adds someone who isn’t approved by the lender
- Changes ownership in a way that isn’t protected by law
Let’s break this down with common scenarios.
Transfers That Often Trigger Refinancing:
- Selling to a Third Party
- The buyer must secure a new loan. The existing mortgage cannot be passed along unless it’s assumable (rare).
- Transferring to a Business Entity
- Moving property into an LLC or corporation—even if you own it—typically triggers refinancing unless prior lender approval is obtained.
- Adding an Unrelated Party to the Deed
- Gifting a portion of ownership to a friend or distant relative may prompt the lender to call the loan due.
- Transferring Between Unmarried Partners
- Lenders may treat this as a risky change in ownership structure and require a refinance.
Transfers That May Be Exempt from Refinancing
Thanks to the Garn-St. Germain Depository Institutions Act of 1982, certain property transfers are federally protected and do not trigger the due-on-sale clause.
Exempt Transfers Include:
- Transfer to a spouse or child due to the borrower’s death
- Transfer to a living revocable trust, if the borrower remains a beneficiary
- Divorce-related transfers to a spouse or ex-spouse
- Inheritance by a relative after the borrower’s death
Tip: Even if a transfer is exempt, you may still be required to notify the lender and provide documentation to avoid misunderstandings.
Mortgage Assumption vs. Refinancing
Before diving into refinancing, it’s worth exploring another option: mortgage assumption.
What is a Mortgage Assumption?
A mortgage assumption allows the new property owner to take over the existing mortgage—same terms, same balance—without triggering the due-on-sale clause.
However:
- Most conventional loans are not assumable.
- FHA, VA, and USDA loans may be assumable with lender approval.
- The new owner must still qualify financially.
Example:
- Original Mortgage Balance: $200,000 at 3.5% interest
- New market rate: 6.75%
- Monthly Savings via Assumption: ~$400/month
If the loan can’t be assumed, refinancing becomes the only option.
Refinancing Triggers in Specific Scenarios
Situation |
Refinancing Required? |
Reason |
| Sale to an unrelated party | ✅ Yes | Transfer of ownership; due-on-sale clause applies |
| Transfer to an LLC | ✅ Yes | Not covered by federal exemptions |
| Death of borrower (inherited by child) | ❌ No | Federally protected event |
| Divorce – transfer to ex-spouse | ❌ No | Garn-St. Germain exemption |
| Adding child to title while alive | ✅ Possibly | Depends on lender’s policy |
| Transfer to revocable trust | ❌ No | Borrower remains beneficiary |
When Refinancing is Required: What to Expect
Refinancing means the new owner (or existing borrower) applies for a brand-new loan.
Requirements Include:
- Credit check
- Debt-to-income (DTI) assessment
- Income and employment verification
- Appraisal of property value
Costs of Refinancing:
- Closing costs: 2%–5% of the loan amount
- Title search and insurance
- Possible prepayment penalties (rare)
Pro Tip: If refinancing is unavoidable, use it as an opportunity to:
- Lower your interest rate
- Switch to a fixed-rate loan
- Cash-out equity, if needed
How to Navigate the Refinancing Process Smoothly
1. Review Your Mortgage Documents
Look specifically for:
- Alienation clause
- Assumption terms
- Exemptions
2. Consult Your Lender
- Ask about the specific requirements for your type of transfer
- Inquire whether the loan can be assumed or must be refinanced
3. Work With Professionals
- Real estate attorney (especially for estate or trust transfers)
- Mortgage broker (to compare refinancing options)
4. Prepare Your Financials
- Check credit score
- Pay down debts
- Gather income documentation
Frequently Asked Questions
What if I don’t tell the lender about the transfer?
Technically, this is a violation of your mortgage contract. The lender could demand full repayment at any time.
Is refinancing required if I inherit a home with a mortgage?
Not necessarily. You may be allowed to continue the mortgage payments, especially under Garn-St. Germain protections.
How long does refinancing take?
Typically 30–45 days from application to closing.
Conclusion: Plan Ahead to Avoid Surprises
Transferring property might seem like a simple act of ownership change—but in the world of mortgages, it can activate serious consequences. If you’re not careful, a well-meaning gesture—like putting a loved one on the deed—can lead to costly refinancing requirements or worse, a demand to repay the full loan balance.
Key Takeaways:
- Alienation clauses can be triggered by property transfers
- Federal exemptions protect certain family-related transfers
- If refinancing is required, prepare in advance
- Always consult with professionals before making changes to title or ownership
Next Step:
Thinking of transferring property? Review your mortgage documents, and speak with your lender or a legal advisor to avoid surprises—and safeguard your financial future.