If you have fallen behind on your mortgage payments and want to leave your property, one possible option to avoid foreclosure is a mortgage assumption. Read on to learn what it means to “assume” a mortgage, when a mortgage can be assumed, and how a mortgage assumption could help you prevent a foreclosure.
(If you are struggling to pay your mortgage or facing imminent foreclosure, visit our Foreclosure section for help.)
A mortgage assumption is a transaction where a new person takes over responsibility for the loan. The property is transferred (for example, sold to another party) and the buyer steps into the original borrower’s shoes and starts making the monthly payments and complying with other terms of the existing loan. The terms, interest rate, principal balance, and monthly payments stay the same.
Some Mortgages Are Assumable
If the mortgage contract states that the mortgage is assumable, then you can transfer the property and mortgage to a new owner. If the mortgage contract is silent on this matter, in most states, the mortgage is considered assumable.
Most lenders require that the new owner qualify for the mortgage and go through an approval process in order to assume the mortgage. The lender will run a credit check on the buyer, as well as verify the buyer's employment and income.
The Mortgage May Not Be Assumable Because of a Due on Sale Clause
Many, if not most, loan contracts contain a “due on sale” provision. This clause states that if the property is transferred to a new owner, then the full loan balance will be accelerated and the entire balance of the loan must be repaid. If there is a due on sale clause, the mortgage usually cannot be assumed.
Exceptions to the Due on Sale Clause
There are a few exceptions where a mortgage can be assumed, even if there is a due on sale clause in the mortgage. The federal Garn-St. Germain Depository Institutions Act of 1982 generally governs the enforceability of due on sale clauses. The Act prohibits enforcement of a due on sale clause in certain transactions such as:
- a transfer from a parent to child
- a transfer to a relative upon the borrower’s death
- a transfer between spouses, and
- transfers resulting from a divorce or legal separation.
In addition, sometimes a lender will agree to forego the enforcement of the due on sale provision if it means it will start receiving a steady stream of payments from someone. The lender may also agree to an assumption if the current market value of the property is less than the outstanding indebtedness and the purchaser is willing to make up the difference in cash.
Assuming a Mortgage That Is in Default
If a borrower is behind in mortgage payments and facing foreclosure at the time of the transfer, then the person who is assuming the mortgage will have to cure the default to stop the foreclosure. Usually, the new owner will either pay this amount in full or come to an agreement with the lender to catch up on the past-due amounts in a repayment plan or as part of a loan modification under a program such as HAMP.
The Federal Home Affordable Modification Program (HAMP) has comprehensive rules for how loan servicers (the company you make your mortgage payment to) should handle the transfer of title issue upon death, divorce, and similar circumstances.
(To learn about HAMP and other government programs for distressed homeowners, visit Nolo's Government Foreclosure Prevention Programs area.)
Workout Options for Fannie Mae Loans
If the loan is in default at the time of assumption, Fannie Mae requires loan servicers to evaluate the new owner for a workout option such as HAMP, a standard modification, mortgage release, or short sale if the due on sale clause is unenforceable.
(To find out if Fannie Mae owns your loan, go to www.fanniemae.com/loanlookup.)
Borrower Liability Following Assumption
In some assumptions, the lender may release the original borrower from his or her obligation on the promissory note, however, in most cases, the original borrower remains liable on the note. (Learn more about promissory notes in our article What's the difference between a mortgage and a promissory note?)
This means that, depending on state law and the circumstances of the particular case, if the new owner stops making mortgage payments at some point in the future and goes into foreclosure, the lender may come after the original borrower for a deficiency judgment to collect the debt.
(Learn more about deficiency judgments.)
For More Information
A mortgage assumption is only one way to prevent a foreclosure. If you are struggling to make your mortgage payments, your home is underwater, or foreclosure is imminent, visit our Alternatives to Foreclosure area to learn about the different options to avoid foreclosure.
For specific information concerning a loan assumption, call your loan servicer.