What is Assumption?
Mortgage assumption, also known as an Assumption Clause, is a clause in a mortgage contract that allows a home’s seller to transfer liability for the current mortgage to the property’s buyer. To put it another way, the new homeowner takes over the old mortgage and, with it, ownership of 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.
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. All mortgages are potentially assumable, though lenders may apply a due-on-sale clause to prohibit the assumption of a mortgage loan. 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 Assumption work?
The buyer’s assumption of a mortgage is usually included in the deed, however it is not required to be in writing. An explicit assumption is required in most jurisdictions. The court will conclude the purchaser did not intend to take the mortgage if the deed is silent or confusing on the subject.
Some, on the other hand, allow the assumption to be indicated based on the parties’ actions. Making mortgage payments, for example, can indicate a desire to take the loan, as can paying less than the property’s value (if the difference is the amount outstanding on the mortgage). The purchaser buys the property subject to the mortgage if he or she does not assume the mortgage, which means the property is still encumbered and the lender has an interest in it.
What are some Assumption restrictions?
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. However, due to the purposeful lack of payable on sale stipulations, all FHA insured and VA loans (dated after March 1, 1988) are assumable as long as the buyer is creditworthy.
Prior to assuming an existing mortgage debt, it is usually necessary to seek the lender’s permission. A sale “subject to” the existing loan is a transfer of property with an existing mortgage loan that is made without the lender’s authorization. In most circumstances, this form of transfer does not prevent the lender from calling the loan due under the loan’s due-on-sale condition.
Common Types of Assumable Mortgages
- FHA Insured Loans – To assume a seller’s mortgage, all mortgages completed after December 1, 1986 need the buyer to be creditworthy.
- VA Loans – To assume a seller’s mortgage, all mortgages completed after March 1, 1988 need the buyer to be creditworthy. If a veteran with house loan eligibility assumes a VA Loan, the seller may request that their eligibility be reinstated after the assumption is completed.
- USDA Loans –A creditworthy buyer can assume all USDA 502 mortgages, but only as a new rate and terms assumption.
- Adjustable-rate mortgages – Though not all, they are often assumed..
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