Mortgage assumption is the transfer of the arrangements and balance of a mortgage taken out on a particular property (usually financed) to the buyer. There are lender or guarantor guidelines to be followed in mortgage assumption, and it is assumed that the party taking on the mortgage is qualified under such guidelines.
Mortgage assumptions usually occur in cases where the seller needs to get rid of their home and the usual methods of finding a buyer for the property have been unsuccessful. It is an option some sellers explore to try and avoid the pain of losing their house to the bank in the form of a foreclosure.
All mortgage can be assumed by another party, however, lenders try to prevent this through the enforcement of a due-on-sale clause. Some mortgages are incontrovertibly assumable, such as mortgages guaranteed by the VA, insured by the FHA or guaranteed by the USDA. Since 2014, about 18% or one in six of FHA and VA mortgages that are assumable have been recorded.
When mortgage has been completely assumed, the seller can go ahead to request a release of liability from the lender. Where the mortgage was assumed without the consent of the lender, the seller remains liable for buyer’s defaults. In cases of VA loans lender’s approval does not need to be obtained prior to the completion of the assumption process. The seller would be released from liability.
Mortgage assumption allows the buyer to accept responsibility for an existing debt secured through a mortgage on the property being purchased. Mortgage assumptions work through two major processes: Qualified Assumptions and Name Change and Title Transfer Requests.
Qualified Assumptions (QA): its basic features include: allowing for release of liability, an average of 90 days for processing and credit qualification requirement. The Qualified Assumptions option allows the release of existing borrowers from a loan while the same terms and conditions remain unchanged. The cost of QA is determined by the mortgage and in certain cases, on the location of the property.
Name Change and Title Transfer Request: its basic features include: allowing for transfer of title, removal of deceased borrowers and simple name changes. This option for mortgage assumption allows administrative changes to loans to be carried out which do not end up in a release of liability. Such changes may include: making changes to the names of existing borrowers that have undergone changes from marriage, divorce or death. In addition, as long as all requirements are met, changes to the title (deed) through transferring ownership to a trust can be done.
The buyer has to be credit-worthy to assume a seller’s mortgage under the VA loans. If a VA Loan is going to be assumed by a veteran with a home loan eligibility, the seller may ask to be re-instated to eligibility status, after assumption has been completed.
The buyer has to be credit-worthy to assume a seller’s mortgage for FHA insured loans.
These are commonly assumable mortgages. However, not all the adjustable-rate mortgages can be assumed.
A creditworthy buyer can assume any USDA 502 mortgages as they are all assumable. However, new rates and terms will apply.
In the early 1900s, sellers had too much equity and the buyers did not have cash enough to close the gap between the sales price and the loan, and a lot of the sellers were not willing to do owner financing.
In addition, the buyers could usually obtain a lower interest through a new loan than through the assumption of an existing loan. It makes more financial sense to get a lower percentage loan than to assume a loan with a higher percentage.
The inclusion of an alienation clause also added to the reluctance of buyers to pursue loan assumptions. An alienation clause in the mortgage meant the bank could accelerate a loan, demanding full payment in the event of a title transfer.
There are a lot of red tape and reasons why a mortgage assumption should ideally not be carried out. However, some sellers, as a result of trouble making payments need to do a mortgage assumption. It is helpful in such cases to find a reputable housing consultant or real estate agent to discuss with and see if the situation would be a good one for a mortgage assumption.
Even though assumption of mortgage is not yet widely used as a vehicle to lower foreclosures, there is the possibility that the number of mortgage assumptions in the future will improve considerably. Troubling times force investors and servicers to explore and accept proposals from property owners that might have been left unconsidered a year ago.
Prior to the start of the assumption process, it is typically necessary to obtain the lender’s consent to assume an existing mortgage loan. If transfer of property with an existing mortgage is done without the lender’s consent, the transfer falls under sales subject to the existing loan. This type of transfer is usually unable to avoid the right of the lender to call up the loan if the loan contains a due-on-sale provision.
There are certain exceptions to this however:
Most types of mortgages in the United States are restricted from assumption by the addition of a due-on-sale clause. The lender is thus permitted by this provision to require full payment on the loan if the property is transferred without the lender’s consent to a new owner. However, VA Loans and FHA insured loans approved after March 1, 1988 can be assumed if the buyer is creditworthy since they do not include due-on-sale clauses.
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