Can A Family Member Assume A Mortgage
As discussed above, not all mortgages can be assumed. For instance, conventional mortgages generally cannot be assumed by a buyer. The reason being is because they typically contain a due on sale clause. A due on sale clause permits a lender to demand the remaining balance on the mortgage if the loan is transferred or sold without the lenders permission.
However, a lender cannot legally trigger a due on sale clause payment in certain situations, such as when an heir is taking over a mortgage from parents after they are deceased or in the event of a divorce. These types of exceptions will normally only apply when a transfer of ownership occurs between relatives, not third parties like a homebuyer.
What Debts Are Forgiven At Death
What Types of Debt Can Be Discharged Upon Death?
- Secured Debt. If the deceased died with a mortgage on her home, whoever winds up with the house is responsible for the debt. …
- Unsecured Debt. Any unsecured debt, such as a credit card, has to be paid only if there are enough assets in the estate. …
- Student Loans. …
Are There Different Types Of Mortgage Assumptions
There are two major types of mortgage assumptions. A simple mortgage assumption completely leaves the lender out of the negotiation, transferring payments between seller and buyer without lender consultation. The seller takes on all of the mortgage liability to the lender, meaning that if the buyer defaults on payments, the seller is still responsible for paying the money back to the lender. In effect, the seller becomes a guarantor of the buyer.
A novation mortgage assumption includes the lender in the negotiation. The lender will have to approve the buyer, and in exchange, the seller is relieved of the responsibility of paying the loan back if the buyer defaults at any point. This is the better choice for family members who want to sell and completely relieve themselves of any association with the home in question.
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Do I Need A Down Payment When Assuming A Mortgage
When you assume a mortgage, you take over the homeowners remaining principal balance.
The current borrower has likely paid off a chunk of their mortgage. The home may have also increased in value since it was purchased. So there will be a difference between the loan amount you assume and the purchase price.
That difference is your down payment. And it may be higher than the down payment youd have to make on a new loan.
Lets go back to the example we used above: Say the seller got a $200,000 mortgage at 2.6% in January 2021.
Imagine its now January 2023, and you want to assume that mortgage.
Well, the original borrower made a 3.5% FHA down payment of $7,500 on a $207,500 home. And home price inflation means the market value is now, perhaps, $220,000.
Working out your down payment amount
Because the homeowner made all their monthly payments over the past two years, they reduced the mortgage balance to around $190,900.
Imagine youre buying the house at its exact market value: $220,000.
- Youre paying $220,000
- But your assumed mortgage is only $190,900
- You need a down payment of $29,100
- That’s a 13% down payment
If youre assuming a VA or FHA loan, the minimum down payment is 0% or 3.5%, respectively. So youre putting a lot more money down than youd need to on a new mortgage.
But, youre also securing a far lower interest rate than youd likely get otherwise.
Using a home equity loan to fund your down payment
Alternatives To Loan Assumption
While there are some compelling reasons to consider an assumption, it is not always the best way to protect your home or move forward after your divorce.
Furthermore, it may not provide you with the funds necessary to comply with any potential buyout, alimony, or community interest payments you need to make to your spouse.
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The Loan Assumption Process Is Time Consuming
Assumptions tend to be more time consuming than other methods of taking over a loan. The approval process is often lengthy, and your lender might require a new loan title policy.
A new loan title policy would require a title company to research your property and obtain approval from their underwriters, extending the timeline further.
There is also a lot of paperwork involved, and it can take time to get everything signed and filed. If your lender is not familiar with the process, it can take longer for them to complete the paperwork and obtain underwriter approval.
While most lenders are compassionate towards your situation, not all lenders are equipped to deal with loan assumptions properly. So, be sure to talk it over with your lender to see where they stand.
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How To Assume A Va Home Mortgage Loan
The ability to assume a VA Loan is a great feature of the VA Home Loan Benefit. It allows a Veteran or active duty homeowner to sell their home to another willing and able buyer and have the new buyer assume the sellers existing VA home loan. The buyer does not need to generate a new loan to purchase the house. This becomes a popular feature when interest rates rise, because the older existing loans will usually have lower rates.
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What Are Assumable Mortgages And How Can You Get One
When Carol Addy began in the mortgage industry more than 20 years ago, assumable mortgages were quite well known. Some of them even allowed the buyer to take over someones house loan without even getting financially qualified first.
But that type of program went away, says Addy, vice president and national sales manager for FirstBank Mortgage Partners in Charleston, S.C., She is also finishing her year-long presidency for the Mortgage Bankers Association of the Carolinas.
Assumable mortgages still exist, but its hard to find them anymore, she adds. And the buyer must qualify for the mortgage they are trying to assume.
Cons Of Assumable Mortgages
The grass isn’t always greener on the other side. There are often additional risks involved with assumable mortgages, especially when it comes to VA home loans. If a buyer takes over a freely assumable mortgage and transfers ownership to an undisclosed third party, sellers may be unaware of the transaction, increasing the potential for default payments.
Sellers of homes with VA loans may lose their entitlement altogether, affecting their eligibility for future VA home loans. To prevent this from happening, sellers need to obtain a release of liability after closing and provide proof to the Department of Veterans Affairs to reinstate their entitlement.
Buyers are also limited to the original terms and conditions of the seller’s lender, restricting the ability to search for more competitive rates or terms.
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What Is A Non Qualifying Assumable Mortgage
A non-qualifying assumable loan is a mortgage usually that a person has, and that person wants to sell his or her house. And he happens to hold a mortgage on that house that is assumable. In other words, you as the potential buyer do not have to meet any particular credit standards in order to buy that house.
What Is An Assumption
A home loan assumption allows you as the buyer to accept responsibility for an existing debt secured by a mortgage on the home youre buying. The two processes available to suit your needs are Qualified Assumptions, and the Name Change and Title Transfer Requests.Compare and find the option thats right for you:
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Pros Of Assumable Mortgages
Assumable mortgage homes for sale have a significant marketing advantage. Buyers looking for a simplified home buying process and a potentially lower interest rate make assumable mortgages very attractive.
Lower interest rates mean higher savings for buyers, potentially in the thousands. Plus, without the need for an appraisal, buyers have the option of pocketing a few hundred dollars instead of paying additional fees.
Tips For Assuming A Mortgage From A Family Member
Transferring a mortgage between family members can be an easy, legal way to bypass many of the requirements of the traditional selling process, but there are pros and cons that you should know about.
If you want to take over a mortgage from a family member, but would like to avoid the hassle of refinancing or starting the entire loan application process from square one, there are certainly ways to do that.
But, as always when it comes to real estate matters, there are rules and laws that govern this process, and to successfully transfer the loan, you’ll have to understand what you can and can’t do.
Here are five tips that cover some of the most important aspects of the mortgage assumption process.
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Why Do Sellers Offer Assumable Mortgages
Sellers in an environment of rising interest rates offer assumable mortgages as an incentive to prospective buyers. Historically, home sales slow with rising interest rates. If its a buyers market, you might be looking for those extras. If sellers can offer a mortgage at a lower interest rate to buyers, the savings could be substantial and cost sellers nothing.
How To Qualify For Mortgage Loan Assumption
In order to qualify for a mortgage assumption, you first need to confirm that the house you want is eligible for assumption. Then, unless youre buying the house from a family member, you should be prepared to meet the same minimum credit and income requirements that apply to typical, non-assumed mortgages. The table below lists the minimum requirements for the most common loan types:
|41% back-end ratio|
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What Is An Assumable Mortgage Loan
An assumable mortgage is one that allows a new borrower to take over an existing loan from the current borrower. Typically, this entails a home buyer taking over the home sellers mortgage.
The new borrower the person assuming the loan is in exactly the same position as the person passing it on. Theyll have the same terms and conditions, the same mortgage rate, the same remaining repayment period, and the same mortgage balance.
In other words, its effectively swapping one borrowers name on the mortgage agreement for another.
In this article
Know What Kind Of Mortgage You’re Dealing With
Before you try to assume your family member’s mortgage, you should research what type of mortgage it is.
Some types of loans â FHA loans and VA loans, to cite two examples â can be smoothly transferred between individuals with very little trouble. These two types of government loans don’t even require the second, newer party to go through a financial application and approval process.
Other mortgages are not often so generous with their terms. Many institutions explicitly bar loan assumption, and will insert a due-on-sale provision, or an acceleration clause, that requires the seller to pay off the loan when the property leaves their hands.
This can be a significant obstacle to the loan transfer, but there’s good news â depending on your circumstances, federal law may require your bank to let you assume your family member’s mortgage.
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Purchasing A New Home
While purchasing a new home might not offer you the security you have in your existing home, it is a good way to start your new life. By buying a separate property with a new mortgage, you do not have to worry about removing your spouse from the loan or title documents.
If you are court-ordered to pay your spouse a divorce settlement or make alimony payments, a new mortgage with a lower payment might be a better option for you.
If you decide to purchase a new home, you can use your portion of the proceeds from the sale to pay off any money you owe your ex-spouse for their interest in community property you shared. You can then start over with a new mortgage in a home that fits your life as a single person.
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Who Can Assume A Va Loan
VA loans are approved for veterans, current military personnel, and spouses who qualify for the benefits of serving their country while in the military. As part of the VA loan assumptions, the assuming borrower must be financially qualified for the mortgage, regardless of whether the borrower is a veteran or not.
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A Special Caution For Va Assumable Loans
Theres one special note for those who might be looking to have someone assume their VA loan. Although anyone can assume a VA loan, even those without the usual military service required to obtain the loan initially, the only way to have your VA entitlement restored so that you can buy another home with a VA loan is to have the home assumed by a fellow eligible active-duty service member, reservist, veteran or eligible surviving spouse.
In this case, their entitlement is substituted, and your VA entitlement is restored. If a civilian or non-eligible service member assumes your loan, your VA entitlement cant be restored until the loan has been fully repaid. In this situation, youll need to consider other mortgage options to buy a new home.
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Advantages Of Assuming A Mortgage
1. If the assumed interest rate is lower than current market rates, the buyer immediately saves money
2. There are also fewer closing costs when taking out a mortgage, t his can save both the seller and the buyer money. If the buyer can obtain a lower interest rate, the seller may find it easier to negotiate a price that is closer to the fair market asking price
3. The seller may also benefit from using the assumable mortgage as a marketing strategy to attract buyers because not all mortgages are assumable, the seller may gain an advantage over the market competition.
Can You Quitclaim A Property With A Mortgage
A quitclaim transfers a property’s title but any mortgage the grantor has will not transfer. This is particularly dangerous if the grantor’s mortgage includes a due-on-sale clause, as the clause will require the grantor to pay the entire remaining balance of the mortgage once the title changes hands.
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Two Kinds Of Assumable Mortgages
There are two types of assumable mortgages.
The first is a simple assumption. This means the buyer takes over making payments on the mortgage without involving the lender.
Anyone can do a simple assumption through a purely private arrangement. But these agreements are risky.
The trouble with a simple assumption is that the original borrower retains complete liability for the mortgage.
If the buyer falls behind with payments or otherwise breaches the mortgage agreement, its the seller whose credit and bank balance will suffer. And if the lender finds out, it might demand that the mortgage balance is paid in full right away.
Simple assumptions are exceedingly rare except sometimes for family transactions. You may be willing to accept the risk if the person taking on the mortgage is, say, your spouse, son, or daughter. But in most situations, a simple assumption is too risky to make sense.
Most assumable mortgages are novations. These require the consent of the mortgage lender, so the buyer will go through the same underwriting process as any other new borrower complete with a credit evaluation and financial documentation.
The good news is, with a novation, the original borrower walks away free and clear. Whatever happens to the loan after the transaction is complete is purely between the lender and the new borrower.
What Are The Advantages Of An Assumable Mortgage For The Buyer And Seller
The buyer gets a much lower interest rate than the current rates, especially with rates rising.
The seller will have reduced fees because they dont have to pay real estate commission. They can sell their home outright without too much marketing or open houses. Plus an assumable mortgage helps the seller have more negotiating power on price.
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Large Cash Down Payment Requirement
The biggest downside to assuming a mortgage is that a buyer may need to have more cash on hand than they would if they were applying for their own mortgage. One reason for this is that if the seller has owned the home for a while, they could have substantial equity built up, and the buyer would have to reimburse the seller for that equity. Even if they dont have equity built up, the buyer would have to pay upfront for any appreciation in the homes value.
For example, if the seller bought a home 5 years ago for $200,000 and is offering it for $250,000 now, the buyer would take over the mortgage and repay the seller for any equity built up, which in this example would be $50,000. If they have the cash on hand, the buyer will walk away with a good deal. If not, theyll have to take out a second mortgage, typically at a higher interest rate, albeit for a much lower principal.