Loan assumption is where the purchaser of a house takes over this seller’s house loan and pays the remainder of the sales price with owner financing or together with cash, another loan. This typically occurs at a time when interest rates are large enough to create the original loan of the seller appealing. Many loan forms have clauses which prohibit loan assumption, but mortgages insured by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) are still assumable.
Time Frame
As stated by the Department of Housing and Urban Development (HUD) guidelines for FHA-insured mortgages, all FHA loans are assumable. Any loans originated before Dec. 1, 1986, are freely assumable, so there are not any limitations on the premise. Mortgages from 1986 through Dec. 14, 1989, are freely assumable also due to congressional actions in 1989 that voided the final document language of loans from this interval.
Conditions
There are a few conditions on assumptions of loans originated in this period. Those buying the home for a house and investors must buy down the loan into a 75 per cent loan to value. For example, if the home’s value is $100,000, then the purchaser must pay the loan to $75,000 down to release the loan holder from liability. Owner occupants have to pay down the mortgage into an 85 per cent loan to value.
Considerations
FHA loans originated on or after Dec. 15, 1989, are assumable exclusively by borrowers that can demonstrate creditworthiness. In other words, the owner must undergo the approval procedure he’d undergo to get a brand new FHA mortgage. Investors cannot assume an FHA mortgage originated following this date under some conditions. Unless the vendor retains an ownership interest in the property, any premises become due and must be paid in full. A good example of this would be a mother who adds her son into the deed and enables him to assume the mortgage. She must stay on the name to the house.
Misconceptions
Loan assumptions don’t get rid of the owner from responsibility for the loan. The original owner still maintains liability for the remainder of the loan in addition to the brand new owner (buyer). The loan will show on both the original and new owner’s credit reports. If the owner doesn’t make the payments, the lending institution will come payments will be shown by the two charge reports and following the owner for the balance due. In addition, if the owner is unable to bring the house forecloses and the mortgage current, the foreclosure will appear on both credit reports.
Prevention/Solution
The only way the loan holder may remove himself out of this liability is to ask for a novation, that is a release from liability given by the lender. For loans on or after Dec. 15, 1989, since the borrower must demonstrate creditworthiness, the FHA requires the creditor to complete a release. On loans the owner must request a release in writing. The creditor is required to release the original owner only if the owner is found creditworthy and agrees to take full assumption of the debt in writing.