Tuesday, February 26, 2013

Assumable vs. Non-Assumable Loans

Can someone assume my loan?  In most cases, the answer is no.  The main reason is due to 2 predominant factors: 1) Since the mid -80's conventional financing does not allow the loans to be assumable and 2) Due on sale clauses within the Deed verbiage now forbids the transfer of the loan to the new buyer without recourse from the current servicer/lender.

Of course, assumable loans - with rates in this current market, may become very attractive for buyers in the next 5-10 years as interest rates rise from their current levels.  However, the dangers and risks with assumable loans are too great for lenders and so they are rare.  Below are some good tips on assumable loans and what they mean.

  • What does it mean to have an assumable loan?  Basically an assumable loan allows the new buyer to "assume" the responsibility of the seller's loan obligation.  The benefit would be that the new buyer can take advantage of the seller's interest rate and remaining loan term, without having to "re-start" the process.
  • What does it mean to have Non-Assumable loan?  A non-assumable loan is when the buyer must find their own financing in order to purchase a home from the seller.  The seller must pay off their loan in order to sell their property.
Now that we have an understanding on "Assumable" vs. "Non-Assumable" loans, let's look at the benefits and what type of programs allow for an "assumable" loan.

The main loan types that offer assumable loans are FHA and VA loans.  Most of these types of loans can be transferred and assumed by a new buyer per the loan guidelines.  However, servicers/lenders typically put restrictions on the potential buyer that will be assuming the loan.  For example, they require the buyer to go through the credit and income underwriting process to ensure they will be able to make the payment.

If the loan is assumed, then there are 3 common ways this is completed:

  1. Assignment - this is where the loan is assigned to the new buyer, however, in the event of a default, the original owner could be "secondarily liable" for the resulting default of any remaining obligation.
  2. Subject to - this is again, the same as above, however, the original owner could be found liable for any deficiencies if the property is sold and the loan remains outstanding...think short sale.  So a new buyer assumes the new loan and when they sell the property, $30K is still remaining.  The original owner would be responsible.
  3. Novation - the least common type of assumption, but the best kind because the original owner/note holder is released from all obiligations of the loan from the time the assumption is completed.  Again - this would require a full underwrite on the new borrower and a very good reason for why they are assuming the loan.  Because, remember, the lender, if the borrower qualifies, would be better served to just enact a new loan at new market rates, etc.
Assumptions, while common in the late 70's and early 80's, are no longer the process that people think it is.  It's never going to be an easy process, but if you have a FHA or VA loan and it is assumable, perhaps in 5 years or so when you go to sell the property, this could be a great selling point for a new buyer.

For more questions and more anwers, you can read up on assumptions: http://web.finweb.com/mortgage/understanding-assumptions.html

11 comments:

carrie said...

How does one that has full title on the homes deed but another person has full ownership of the mortgage regain complete ownership. The current mortgage is 180k in default and the bank will not work with the person living in the home that has the deed.

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