If you’re behind on your mortgage payments and you financial instability at the moment is making you wonder to resort to a situation in which you finally say to yourself “Now, I need someone to take over my mortgage payments”. After this determination, an assumption may be a viable alternative to save your home from going into foreclosure. As soon as the new owner takes over the loan, he or she becomes personally accountable for the outstanding mortgage obligation.
Another scenario is that if you inherit a mortgaged property, or gain ownership via a divorce or other intra-family transfer, but are unable to make the payments, taking the debt as part of a loan modification may enable you to retain the property.
Understanding the Difference Between Promissory Notes and Mortgages
Before you can completely comprehend what it means to assume a loan, you must first comprehend the distinction between a promissory note and a mortgage or a deed of trust, among other things. (“Mortgage” and “deed of trust” are phrases that are used interchangeably in this article for the purposes of this article.)
It is common for people to refer to both the promissory note and the mortgage under the umbrella word “mortgage.” In contrast, the note is the legal instrument that establishes the borrower’s commitment to repay the loan. The mortgage, on the other hand, provides the lender with a means of enforcing that guarantee; for example, the lender may foreclose on the property and use the profits of the foreclosure sale to repay the debt.
Following a foreclosure, in the vast majority of states, the lender has the right to pursue the borrower for the difference between the selling price of the property and the entire amount of debt owed. The promissory note outlines the borrower’s obligation to make good on the shortfall.
What Does It Mean to Assume a Loan Mean in Practice?
An assumption is a transaction in which a new individual assumes financial responsibility for a debt, either with or without releasing the original borrower’s financial responsibility for the loan.
As a general rule, an assumption operates as follows: Consider the following scenario: you wish to sell your property and bequeath it to another party, with the new owner taking on the duty of repaying the loan you obtained. If an assumption is permitted, the lender will almost always need the new owner to qualify for the loan and go through an approval procedure before taking over the loan as the new owner. The lender will almost certainly do a credit check on the buyer, as well as verifying the buyer’s job and earnings.
The Liability of the Borrower Following an Assumption
In rare cases, the lender will relieve the original borrower from the obligation established by the promissory note. This is known as a release of obligation. In other instances, though, the original borrower is still accountable for the debt. Consequently, depending on the state legislation and the circumstances, if the new owner stops making mortgage payments and the house goes into foreclosure, the lender may seek a deficiency judgment against the original borrower and the person who took obligation in order to recover the debt.
Due-On-Sale Clause: How Do I Determine Whether or Not My Loan Is Assumable?
Assuming that the debt is assumable according to the documentation, you may transfer the property. Loan to a new owner. However, if the loan contract is silent on the subject, the debt is generally regarded assumable in most jurisdictions.
A “due-on-sale” clause, on the other hand, is included in many, if not most, mortgage contracts nowadays. This condition specifies that if the property is transferred to a new owner. The complete loan sum may be accelerated, which implies that the entire loan total must be returned immediately. In most cases, where a mortgage has a due-on-sale provision, the debt cannot be inherited.
Verify the terms of your mortgage contract to see whether or not your loan is subject to a due-on-sale provision. Keep in mind that the documentation may not clearly state that the payment is due on sale. “Transfer of the property” or anything along those lines might be referred to.
When a Lender Is Unable to Enforce a Due-On-Sale Clause, There Are Some Exceptions
Due-on-sale provisions in mortgage contracts are typically permitted by the federal Garn-St. Germain Depository Institutions Act of 1982, which was passed in 1982. Although just a few states took action within the three-year window provided by this bill. States that had previously implemented due-on-sale regulations were given three years to reenact or impose additional limitations.
However, the Garn-St. Germain Act prohibits the implementation of a due-on-sale condition after certain types of property but not limited to, the following:
- On the death of a joint tenant or tenant, the property is transferred through devise, descent, or operation of law.
- A loan that is transferred to a relative as a consequence of the death of a borrower.
- A transfer in which the borrower’s spouse or children become the legal owners of the real estate property.
- A transfer arising from a divorce decree, a legal separation agreement, or an incidental property settlement arrangement. In which the borrower’s spouse becomes the legal owner of the property
- An inter vivos trust in which the borrower is and remains a beneficiary. Which does not relate to a transfer of rights of occupancy in the property (12 U.S.C. 1701j-3, 12 C.F.R. 191.5) is defined as follows: