Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage?

If you're behind on your mortgage payments and want to sign the deed to your home over to a new owner, an assumption is one possible option to avoid foreclosure. When the new owner assumes the loan, that person becomes responsible for the mortgage debt.

Or, if you inherit a mortgaged property or get ownership through a divorce or other intra-family transfer but can't afford the payments, assuming the loan as part of a loan modification might allow you to keep the property.

Understanding Promissory Notes and Mortgages

Before fully understanding what it means to assume a loan, you must understand the difference between a promissory note and a mortgage or deed of trust. (For the purpose of this article, the terms "mortgage" and "deed of trust" mean the same thing.)

People often use the term "mortgage" to refer to both the promissory note and mortgage. But the note is the document that creates the obligation to repay the loan. The mortgage, on the other hand, gives the lender a way to enforce that promise—that is, the lender may foreclose and use the proceeds from the foreclosure sale to repay the loan.

Following a foreclosure, in most states, the lender can go after the borrower for the deficiency between the foreclosure sale price and the borrower's total debt. The promissory note establishes a borrower's liability for the deficiency.

What Does It Mean to Assume a Loan?

An "assumption" is a transaction where a new person takes over financial liability for the loan—either with or without a release of the original borrower's liability.

Here's how an assumption generally works: Say you want to sell your home and deed it to another party, with that new owner taking over responsibility for repaying the loan you took out. If an assumption is allowed, the lender usually requires the new owner to qualify and go through an approval process to assume the loan. The lender will probably run a credit check on the buyer and verify the buyer's employment and income.

Once the assumption is approved, and the necessary documents are signed, the buyer steps into your (the original borrower's) shoes and starts making the monthly payments and complying with other terms of the existing loan. The loan terms, interest rate, principal balance, and monthly payments remain unchanged.

You (the seller or transferor) will remain liable for the debt unless the lender releases you from this obligation. The new homeowner also takes on personal liability for the debt.

Borrower Liability Following an Assumption

In some assumptions, the lender will release the original borrower from the obligation created by the promissory note. But in other cases, the original borrower remains liable on the note.

So, depending on state law and the circumstances, if the new owner stops making mortgage payments and loses the home to foreclosure, the lender might come after the original borrower, along with the person who assumed liability, for a deficiency judgment to collect the debt.

How Do I Know if My Loan Is Assumable or Not?

Not all loans are assumable. Loans that the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. The Department of Agriculture (USDA) back may be assumable if specific requirements are met.

Also, if the paperwork states that the loan is assumable, you can transfer the property and loan to a new owner. Look for an assumable clause in your contract. If the loan contract is silent on this matter, though, the loan is considered assumable in most states.

Due-On-Sale Clauses

However, many, if not most, mortgage 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 can be accelerated. Once the loan is accelerated, the entire loan balance must be repaid. Generally, the loan can't be assumed when a mortgage has a due-on-sale clause.

Check your mortgage contract to determine if your loan is subject to a due-on-sale clause. Be aware that the paperwork might not specifically use the words "due on sale." It could refer to a "transfer of the property" or something similar.

Exceptions for When a Lender Can't Enforce a Due-On-Sale Clause

The federal Garn-St. Germain Depository Institutions Act of 1982 generally allows due-on-sale clauses in mortgage contracts. But the Garn-St. Germain Act bars enforcement of a due-on-sale clause after some kinds of property transfers, including, but not limited to:

• a transfer by devise, descent, or operation of law upon the death of a joint tenant or tenant by the entirety
• a transfer resulting from a borrower's death to a relative who will occupy the property
• a transfer to a borrower's spouse or children who will occupy the property, and
• a transfer resulting from a decree of dissolution of marriage, legal separation agreement, or incidental property settlement agreement where the transferee becomes the owner and occupies the property. (12 U.S.C. § 1701j-3, 12 C.F.R. § 191.5).

So, if you get real estate ownership due to one of these kinds of transactions, the lender can't enforce a due-on-sale clause. You may make the payments on the loan (even though you weren't an original borrower), and you can assume the debt if you want to. (Note that the Garn-St Germain Act gave states with prior laws concerning due-on-sale clauses three years to reenact or enact new restrictions. But only a couple of states acted within this period. In those states, federal law doesn't preempt due-on-sale provisions for some specific kinds of loans.)

Also, after a Garn-exempt transfer, the ability-to-pay rule doesn't apply, and the person assuming the loan shouldn't have to go through an underwriting process or credit screening, except in some instances, like in the case of a Fannie Mae loan, when the original borrower wants a release of liability.

Sometimes Lenders Won't Enforce a Due-On-Sale Clause

Sometimes a lender will agree to forgo the enforcement of the due-on-sale provision if it means it will start receiving a steady stream of payments from someone.

The lender might also agree to an assumption if the property's current market value is less than the outstanding indebtedness and the purchaser is willing to make up the difference in cash.

Assuming a Loan That's in Default

If a borrower is behind in mortgage payments at the time of the transfer, then the person assuming the loan could have to cure the default to prevent a foreclosure.

Usually, the new owner will either pay the overdue amount in full, called "reinstating" the loan, 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 modification.

Getting Help

An assumption is only one way to prevent a foreclosure. If you're struggling to make your mortgage payments, your home is underwater, or foreclosure is imminent, consider talking to a foreclosure attorney to learn more about your options.

A HUD-approved housing counselor is also an excellent resource for information about loss mitigation options.