An associate called today asking, “What about an assumable mortgage?” An assumable mortgage is a type of financing in which one person may take over the existing mortgage from another, or as some say, step into the shoes of an existing home
Although most home buyers today would find current rates to be lower than what mosthome sellers would be offering, the front loaded interest already paid and the reduced closing costs can provide advantages.
For sellers, whether or not your home mortgage is assumable by others could be a great selling point, especially in the years to come as rates return to normal levels. Another consideration is the process is streamlined and does not require an appraisal, repairs or a termite inspection.
When are home loans assumable?
Mortgage notes include a clause stating whether or not the loan is assumable, so that is definitely a place to start. Here is a general overview:
Fannie Mae/Freddie Mac (Conventional Loans)
With little exception, conventional mortgage loans made after 1980 are not assumable and must be repaid on the sale of the property. If an exception is granted (example: certain divorce scenarios, on certain products such as adjustable rate and a few “B” securitized paper) lenders will require an interest rate at the current market price or the current rate, whichever is higher, and the borrower will have to meet the same qualifications as they would for a new loan.
So why would anyone ask for an exception?
Because you do get the benefit of all the front-end interest that has already been paid, and your payments will have more principle reduction due to the inherited amortization, so total of payments can be much less even at a comparatively higher interest rate. I can send you a spreadsheet that will assist you in comparing the option by attaching a dollar value to each scenario.
Housing and Urban Development (FHA, including Section 184)
Although everyone tells us FHA loans are assumable, the reality is that assuming an FHA loan is not a simple consideration. In Chapter 6 of HUD Directive Number: 4330.1 we are given 12 pages of supplemental guidelines, with highlights including:
- Mortgages originated before December 1, 1986, generally contain no restrictions on assumptions and qualifying is not required. Such loans are almost 30 years old, so it’s likely few if any remain outstanding.
- Some mortgages executed in years 1986 through 1989 contain language that is not enforced due to later Congressional action. Mortgages from that period are now freely assumable, despite any restrictions stated in the mortgage.
- Mortgages originated on or after December 15, 1989 require the new borrower must be creditworthy according to current HUD standards
- Lenders must not approve an assumption unless the property is a primary or secondary residence, but later we are told that
- Under the Cranston-Gonzalez National Affordable Housing Act Of 1990, HUD cannot insure a mortgage for a secondary residence and prohibits the assumption of an FHA mortgage made after January 27, 1991 on property intended for use as a secondary residence except for certain hardship exceptions.
- Each mortgage must contain a due-on-sale clause permitting acceleration. If a sale or other transfer
occurs without lender approval the lender MUST demand immediate and full repayment of the loan.
- o FHA will allow the loan to be assumed after it has been in place for 12 months on a primary residence, 24 months if originated as a secondary residence.
- o The lender must release the seller from the liability of repaying the mortgage if there has been a satisfactory creditworthiness check for the new borrower and the prospective purchaser assumes personal liability to repay the loan.
Section 184 Indian Loans
- Eligibility. The security instrument must note that the Section 184 loan may be assumed by a qualified borrower. Borrowers who wish to assume a guaranteed loan must qualify under Chapter 5: Loan Processing and the Firm Commitment. At the time of application for such a transaction, the lender must submit all of the 4/01/2011 Chapter 8-4 information listed in Chapter 5 to HUD for review. Lenders may not approve assumptions of Section 184 loans without prior HUD authorization.
- Release of Liability. All Section 184 loan assumptions include a release of financial liability for the seller. A release of liability must be completed and signed at closing. When the closing documents and release of liability are received, HUD will issue a revised guarantee certificate that reflects the new borrower of record. On trust land, the leasehold documents must be revised. To facilitate the revision, the lender must provide a copy of the release of liability and a deed of transfer to the BIA. The BIA will then record the changes in accordance with current policies and practices, and provide a copy of the approved assignment of the lease to the lender. A copy of the closing documents must be submitted to the Office of Loan Guarantee within 30 days after closing. The release is contained in the Release of Seller Form.(see Appendix 8.8)
- Tribal Involvement. On trust land, the lease document may require tribal approval of the assignment of the lease to the new borrower. Lenders should not proceed to closing on the assumption until and unless the tribe has assigned the leasehold to the new borrower, and it has been approved by the BIA.
- Down payment. A down payment is not required on an assumption if the owner is willing to sell the property for the outstanding indebtedness. If the seller is charging a higher price, the buyer must make up the difference between the purchase price and the outstanding Section 184 debt. Any secondary financing used to make up this gap must be in a second lien position and will be included in the assessment of the borrower’s ability to afford the home.
Rural Development (USDA Loans)
The Guaranteed Rural Housing loan is assumable subject to the following conditions:
- Subject property and applicant(s) must meet all criteria for the Rural Development Guaranteed Housing Program.
- Applicant (buyer) must be credit-approved by USDA Loan.
- In accordance with Rural Development (FmHA) Instruction 1980-D, no release of liability will be granted to the original Borrower.
- A new title policy will be required at closing.
The VA mortgage assumption can be a good idea if the buyer’s VA entitlement is tied up in another loan. The seller can allow his or her entitlement (originally used to acquire the VA loan that is being assumed) to be used by the buyer. If a seller allows his or her entitlement to stay with the loan and be used by the buyer, the seller will be unable to restore this entitlement until the buyer pays the loan in full. If a buyer replaces seller’s entitlement with his or her own, then the seller’s entitlement is released from the loan.
VA loans that closed before March 1, 1988, may be assumed without approval from the VA or the lender. Additionally, the purchaser does not have to be a veteran. Loans closed after require the buyer to be VA eligible and credit-qualified by the lender.
Again, exceptions can be found. VA can allow an unrestricted transfer. For example, this is allowed in cases where a military spouse and a non-military partner are co-borrowers who are currently getting a divorce.
In cases of unrestricted transfer, the VA must approve the transaction, not the lender.
Considerations for Buyers When Assuming a Loan
- The application process consists basically of a credit check and no property appraisal is required.
- The assumable mortgage may not cover the full cost of the home. If this is the case, the buyer will likely have to pay the difference. That may mean a large down payment, or having to find additional financing (a second mortgage) to pay the difference between the assumable mortgage balance and the price of the home.
- The buyer will need to agree to assume the indemnity liability, and the sale will not be complete until the loan holder approves the assumption. This can take time.
- The buyer will need to be qualified by the agency and/or the loan holder before the loan assumption can be approved. You must demonstrate good credit and that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.
Considerations for Sellers When Offering Assumption
- If you have equity in the home you will forgo it unless you can collect a down payment.
- The existing loan must be current.
- When an FHA-insured loan is assumed, the insurance remains in force (the seller receives no refund). The owner(s) of the property at the time the mortgage insurance is terminated is entitled to any refund.
- When a VA assumption, It should be made clear that even though the release may be approved, the veteran’s home loan benefit may not be restored unless the assumer is willing to substitute his or her VA home loan entitlement.
- The seller may still be responsible for the loan repayment unless there is a Release of Liability (ROL) provided. Any seller who allows assumption by a buyer without a release of liability from the lender is looking for trouble. Even if the buyer pays the seller’s ability to obtain another mortgage will be prejudiced by his continued liability on the old one. The release of liability from the lender must be in writing, and you must preserve the document. This will protect you in the event that the new borrower defaults and the collection agency comes after you because it knows nothing about your release of liability. This has happened!
If the article doesn’t answer all of your questions, please don’t hesitate to drop a question in the comments, or for direct communication, please call me at 918-949-7248.