What is an Assumption Clause?
An assumption clause in a mortgage contract allows the seller of a home to transfer liability for the current mortgage to the property’s buyer. In other words, the new homeowner takes over the old mortgage and, with it, the property that serves as collateral for the loan. The buyer must usually meet credit and other requirements, and the rules for assumption clauses differ depending on the loan type.
Assumption Clause Definition
All mortgages are potentially assumable, though lenders may apply a due-on-sale clause to prohibit the assumption of a mortgage loan. Mortgage assumption is the transfer of the terms and balance of an existing mortgage to the buyer of a financed property, with the assuming party typically being required to meet lender or guarantor qualifications. Certain types of mortgages, such as those insured by the FHA, guaranteed by the VA, or guaranteed by the USDA, are unquestionably assumable. As of 2014, FHA and VA assumable mortgages accounted for over 18 percent of all mortgages in the United States, or one out of every six.
How does an Assumption Clause work?
An assumption clause becomes appealing when the interest rate on an existing mortgage is lower than current market rates. Also, many closing charges can be avoided by the buyer, albeit there are some fees associated with assumptions. A title search, document stamps, and taxes are among the charges.
Because conventional mortgages often restrict the practice, the benefits of an assumption clause are theoretical for most homeowners. Assumption clauses are frowned upon by banks since they base mortgages on the creditworthiness of the original borrower, not an unknown subsequent buyer.
It may be difficult to assess the new owner’s ability to repay, and the bank may be hesitant to take on their risk. Furthermore, even if a bank approved a new borrower’s creditworthiness, it would miss out on the down payment and closing costs associated with a brand-new mortgage.
Qualifying for an Assumable Mortgage
To be eligible for an assumable mortgage, you must first determine whether the loan has an assumption clause. If it does, the lender will look at the buyer’s income, debt ratios, credit scores, and other financial criteria to see if they can repay the loan.
Assumption Clauses in the United States
In the United States, most types of mortgages have a due-on-sale clause that prevents them from being assumed. If the property is transferred to a new owner without the lender’s agreement, this type of clause allows the lender to demand payment of the entire loan balance. Because they purposely lack due on sale stipulations, all FHA insured and VA loans (dated after March 1, 1988) are assumable as long as the buyer is creditworthy.
Assumption Clause Summary
- An assumption provision allows a home’s seller to transfer responsibility for an existing mortgage to the property’s buyer.
- The new purchaser must meet credit and other requirements.
- When the interest rate on the current mortgage is lower than the current rates, assumption clauses are appealing.
- These provisions can also assist buyers in avoiding closing costs.
- The benefits of an assumption clause, however, are theoretical for most homeowners because traditional mortgages often restrict the use.
If you have any other questions regarding an Assumption Clause contact the mortgage experts at 864-397-8500 or click Mortgage Rates Today!
Financial Consultant and Author