Mortgage assumption is the conveyance of the present mortgage to the buyer of a financed property , commonly requiring that the assuming party is qualified under lender or guarantor guidelines. [1] All mortgages are potentially assumable, though lenders may attempt to prevent assumption of a mortgage loan with a due-on-sale clause . Some kinds are irrefutably mortgage assumable, Such As Those insured by the FHA , guaranteed by the VA , or guaranteed by the USDA . As of 2014, FHA and VA assumable mortgages make up about 18%, or one out of every six, mortgages in the United States. [1]

Example

For example, a homeowner owes a 30-year mortgage loan of $ 250,000 against his house. A prospective buyer wants to purchase the house for $ 300,000 and keep the same mortgage in order to avoid going through the process and expense of applying for a new loan. The buyer pays $ 50,000 cash for the equity and assumes the $ 250,000 mortgage, becoming liable for the debt.

Common Assumable Mortgages

  1. FHA Insured Loans – All mortgages executed after December 1, 1986 require that the buyer be creditworthy to assume a seller’s mortgage.
  2. VA Loans – All mortgages executed after March 1, 1988. If a VA Loan is being assumed by a veteran with a home loan eligibility, the seller may also request to have their eligibility re-instated upon completion of the assumption.
  3. UDSA Loans – All USDA 502 mortgages are assumable by a creditworthy buyer, but as a new rate and terms assumption. [2]
  4. Adjustable-rate mortgages – commonly are assumable, though not all.

Consent of Lender

In order to assume an effective mortgage loan it is necessary to obtain from the lender prior to the assumption process. Transfer of property with an existing mortgage loan that is made without the lender’s consent. In most cases, this type of transfer does not avoid the lender’s right to call the loan under the due-on-sale provision in the loan.

Exceptions

  1. VA Loans dated prior to March 1, 1988 may be transferred without the approval of the lender, and may be released from liability on the mortgage loan. [3]
  2. FHA insured loans originated before December 1, 1986. Due to the HUD Reform Act of 1989 FHA mortgages executed between 1986 and 1989 are freely assumable, despite any restrictions stated in the mortgage. [4]

Release of Liability

Upon completion of the assumption, the seller requests a release of liability from the lender. If the mortgage is assumed without the lender’s consent, the seller will remain liable for any default on the part of the buyer. In cases of a VA Loan, a release of liability may be obtained after the assumption even if the lender’s approval was not given prior to the completion of the assumption process.

Restriction on Assumption

In the United States, mortgage assumption of most types of mortgages is restricted by a due-sale clause . This type of provision permits the lender to consent to the payment of the loan. However, all FHA insured loans and VA loans (dated after March 1, 1988) are assumable as long as the buyer is creditworthy because they intentionally lack due on sale clauses.

See also

  • Due-on-sale clause
  • Mortgage note
  • Mortgage law
  • Mortgage Assumption Value

References

  1. ^ Jump up to:b “Zumption FAQ – General FAQ” . Retrieved 2014-06-18 .
  2. Jump up^ “USDA HB-1-3550 – CHAPTER 2: OVERVIEW OF SECTION 502” (PDF) . Retrieved 2014-06-18 .
  3. Jump up^ VA Pamphlet 26-7, Revised – Chapter 5: How to Process VA Loans and Submit them to VA ” (PDF) . Retrieved 2014-06-18 .
  4. Jump up^ “HUD 4155.1REV-5 – Chapter 4: Assumption” (DOC) . Retrieved 2014-06-18 .