Can Your Mortgage Loan be Assumed by a New Buyer, or Does it Have a Due on Sale Clause?

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The general assumption today is that all loans have a due on sale clause. This is the clause that simply says “If you sell the house, you have to repay the loan in full.” It only makes sense, because the house was the collateral for the loan.

Contrary to popular belief, not every loan is “Due on Sale.”

Conventional loans always have a due on sale clause, but can be assumed under special circumstances, such as death and divorce. In addition, VA, USDA, and VA loans are assumable, but permission to do so isn’t automatic. The new buyer must meet certain qualifications, depending upon the type of loan.

Here’s the breakdown:

VA Loans are assumable in deference to the fact that service members seldom stay in one place for long. However, only buyers who meet income and credit standards may assume such loans.

VA loans that closed before March 1988 were freely assumable, but since it’s now been 30 years, you aren’t likely to find one.

FHA loans may also be assumed by buyers who meet lender qualifications. Only FHA loans that closed by December 1989 are assumable without lender approval.

USDA loans can be transferred with lender approval, and only to buyers whose income does not exceed requirements.

Why would anyone want to assume a loan?

One reason would be to save on closing costs. The new buyer merely pays a nominal fee to assume the existing loan. In addition, no down payment is required by the lender.

The buyer does, however, have to pay the seller for his or her equity. This can be in cash, or via a second mortgage. The catch: second mortgages come at higher interest rates, so any savings could be lost.

Today, because interest rates are low, most would not want to assume a loan. However, in years when interest rates were high, it might have been beneficial. If a seller had a loan at 10% and you’d have to pay 16% for a new loan, you’d be very happy to assume the old loan. The problem, as already noted, might be the amount of down payment you’d need to bridge the difference between the selling price and the assumable loan.

The next pitfall is that unless they get a written release from the lender, the original borrowers will still be responsible for repayment of the loan. Should the new buyer default, the foreclosure will still show up on the old buyer’s credit report.

Exceptions to the rules:

In accordance with the Garn-St. Germain Act of 1982, all lenders are required to allow transfers in specific situations. These situations include:

  • Transfer to a living trust, as long as you occupy the property
  • Transfer from one ex-spouse to another, as long as they continue to live in the house.
  • Transfer from a borrower to a spouse or child
  • Transfer to a relative upon the death of the borrower.

Transfers to a spouse or other relative are relatively simple and are done by making additions or subtractions to the deed. There are no new loan documents and the new owner simply takes over payment of the mortgage.

Living Trusts

Note that one exempt transfer is from the borrower into a living trust. This transfer is a bit more complicated, because first the living trust must be established. This is typically done by a lawyer and involves assets in addition to the residence.

Such trusts are created to avoid the time, trouble, and expense of probate when the owner of the house and other assets dies.

After transfer, the trust officially owns the home. It pays the mortgage as long as it is occupied by the former owner. After his or her death, the title and mortgage are transferred to the beneficiaries.

With today’s still-low interest rates, a new loan is probably the best idea…

If you’re ready to make that home purchase, call us at Homewood Mortgage, the Mike Clover Group. We offer fast, friendly service, low interest rates, and minimal closing fees.

Call today: 800-223-7409

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