Learn what it means to “assume” a mortgage loan and how an assumption might be able help you avoid a foreclosure.
If you ‘re behind on your mortgage payments and want to sign over the deed to your home to a newly owner, one possible choice to avoid foreclosure is an assumption. When the modern owner assumes the lend, that person becomes personally liable for the mortgage debt .
Or, if you inherit a mortgaged property, or get ownership through a divorce or other intra-family transfer, but ca n’t afford the payments, assuming the loan as function of a loanword change might allow you to keep the property .
Understanding Promissory Notes and Mortgages
Before you can amply understand what it means to assume a loan, you have to understand the deviation between a promissory note and mortgage or act of trust. ( For the determination of this article, the terms “ mortgage “ and “ deed of trust ” are used interchangeably. )
People frequently use the terminus “ mortgage ” to refer to both the promissory note and mortgage. But the note is the document that creates the debt instrument to repay the lend. The mortgage, on the early pass, gives the lender a direction to enforce that promise—that is, the lender may foreclose and use the proceeds from the foreclosure sale to repay the loan .
Following a foreclosure, in a majority of states, the lender can go after the borrower for the insufficiency between the foreclosure sale price and the borrower ‘s total debt. The promissory note establishes a borrower ‘s liability for the lack .
What Does It Mean to Assume a Loan?
An assumption is a transaction where a raw person takes over fiscal liability for the loan—either with or without a unblock of the original borrower ‘s indebtedness .
here ‘s how an presumption generally works : Say, you want to sell your home and deed it to another party, with that newfangled owner taking over duty for repaying the loan you took out. If an assumption is allowed, the lender will normally require the raw owner to qualify and go through an approval serve to assume the loanword. The lender will probably run a credit check on the buyer, vitamin a well as verify the buyer ‘s employment and income. Once the assumption is approved and the necessity documents are signed, the buyer steps into your ( the original borrower ‘s ) shoes and starts making the monthly payments and complying with early terms of the existing lend. The lend terms, interest rate, chief remainder, and monthly payments stay the same. You ( the seller or transferor ) will remain liable for the debt unless the lender releases you from this obligation. The newly homeowner besides takes on personal liability for the debt .
Borrower Liability Following an Assumption
In some assumptions, the lender will release the original borrower from the obligation created by the promissory note. But in other cases, the original borrower remains apt on the note. so, depending on state law and the circumstances, if the fresh owner stops making mortgage payments and loses the home to foreclosure, the lender might come after the original borrower, along with the person who assumed liability, for a lack judgment to collect the debt .
Due-On-Sale Clause: How Do I Know if My Loan is Assumable or Not?
If the paperwork states that the loanword is assumable, then you can transfer the property and lend to a new owner. If the loanword contract is dumb on this matter, though, in most states, the loanword is considered assumable .
But many, if not most, mortgage contracts contain what ‘s called a “ due-on-sale ” planning. This clause states that if the property is transferred to a new owner, then the full lend balance can be accelerated, which means the entire remainder of the loan must be repaid. generally, when a mortgage has a due-on-sale article, the lend ca n’t be assumed.
To find out if your lend is national to a due-on-sale clause, check your mortgage contract. Be mindful that the paperwork might not specifically use the words “ due on sale. ” It could refer to a “ transfer of the place ” or something similar .
Exceptions for When a Lender Can’t Enforce a Due-On-Sale Clause
The federal Garn-St. Germain Depository Institutions Act of 1982 broadly allows due-on-sale clauses in mortgage contracts. ( This law gave states that had anterior due-on-sale restrictions three years to reenact or enact new restrictions, though alone a couple of states acted within this time time period. In those states, federal law does n’t preempt due-on-sale provisions in some specific kinds of loans. )
But the Garn-St. Germain Act bars enforcement of a due-on-sale article after some kinds of property transfers, including, but not express to :
- a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant
- a transfer to a relative resulting from the death of a borrower
- a transfer where the spouse or children of the borrower become an owner of the property
- a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property, and
- a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property. (12 U.S.C. § 1701j-3, 12 C.F.R. § 191.5).
sol, if you get ownership of real estate as a consequence of one of these kinds of transactions, the lender ca n’t enforce a due-on-sale clause. You may make the payments on the loan ( flush though you were n’t an original borrower ) and you can assume the debt if you want to .
besides, after a Garn-exempt transfer, the ability-to-pay rule does n’t apply, and the person assuming the lend should n’t have to go through an underwrite process or citation screen, except in some instances, like in the case of a Fannie Mae lend, when the original borrower wants a release of liability .
The Servicer Must Comply With Federal Mortgage Servicing Laws After a Garn-Exempt Transfer
If you get property through a Garn-exempt transfer and you meet certain other legal requirements, but you ca n’t afford the monthly payments, federal law requires the servicer to allow you to apply for loss extenuation and be evaluated for all options even if you have n’t formally assumed the loan. Though, the servicer will credibly require you to assume the loanword as a condition of a loss extenuation extend. ( 12 C.F.R. § 1024.30 ( five hundred ) -1, ( five hundred ) -2, See official interpretation ). ( To learn more, see Taking Over the mortgage When Your Loved One Dies. )
Sometimes Lenders Won’t Enforce a Due-On-Sale Clause
sometimes a lender will agree to forgo the enforcement of the due-on-sale provision if it means it will start receiving a steadily stream of payments from person. The lender might besides agree to an assumption if the current market value of the property is less than the outstanding indebtedness, and the buyer is will to make up the deviation in cash .
Assuming a Loan That’s in Default
If a borrower is behind in mortgage payments at the time of the transfer, then the person assuming the lend could have to cure the default to prevent the foreclosure. normally, the newly owner will either pay the delinquent sum in full—called “ reinstating ” the loan —or come to an agreement with the lender to catch up on the past-due amounts in a refund plan or as depart of a modification .
An premise is only one way to prevent a foreclosure. If you ‘re struggling to make your mortgage payments, your home is subaqueous, or foreclosure is at hand, consider talking to a foreclosure lawyer to learn more about your options. A HUD-approved caparison counselor is besides an excellent resource for information about loss moderation options .