How does a “due on sale” clause affect mortgage assumption?
A mortgage transfer is defined as a transaction in which the borrower, or lender, assigns an existing mortgage to another person or entity. If a mortgage can be transferred, it is referred to as “assumable”.
Assumable mortgages fade in and out of popularity depending on the current interest rates. During periods of high mortgage rates, an assumption of an older mortgage with more favorable rates can be tremendously beneficial for the homebuyer. Not only will it save thousands of dollars interest charges, but a buyer who assumes a home mortgage can avoid the closing costs associated with securing a new mortgage loan.
What is mortgage assumption?
Essentially, mortgage assumption is when a buyer assumes the mortgage payments and responsibilities of the existing mortgage held by the seller. In a mortgage assumption transaction, the buyer generally pays the seller cash as compensation for the equity already invested in the property. The buyer then assumes ownership of the mortgage and must make mortgage payments for the original monthly amount at the previously fixed rate of interest.
What mortgages can be assumed?
Mortgages secured by the Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) offer a kind of unofficial mortgage assumption option. With either an FHA or VA loan, the mortgage will generally not include any sort of “due on sale” clause, meaning that the loan will not immediately become due if the homeowner sells the home.
Currently, the majority of traditional mortgages cannot be assumed unless they are guaranteed by either the FHA or the VA. If the buyer satisfies the standard requirements of the FHA or VA, he or she can generally assume a seller’s mortgage at the cost of a few hundred dollars. However, if a “due on sale” clause is included in the underwriting, the loan must be repaid immediately, and mortgage assumption is not possible.
What is mortgage liability?
- Simple mortgage assumptions involve a transfer transaction between the seller and buyer without the consultation of a lender. In this type of transfer, the seller retains all liability, even if the buyer possesses the property but stops paying off the mortgage.
- Novation assumption involves a hot classic dating meeting with a lender who must review and approve the intended buyer, at which time the seller will relinquish responsibility from repaying the loan and will not be held liable for any late or missed payments.
When it comes to mortgage assumption, many people within the banking industry criticize this option as the buyer generally receives tremendous benefits, while the seller and lender are left in a somewhat vulnerable position.
In order to counter mortgage assumptions, many lenders include a Due on Sale clause in their mortgage contracts; this regulation specifies that if a seller transfers the property to someone else, the lender can require that the total amount of the original loan be repaid immediately. Mortgage transfers cannot occur under these conditions, as sellers will be forced to repay the loan, and any prospective buyers will need to secure a new mortgage loan to purchase the property.
Inclusion of a Due on Sale clause provides basic protection for lenders. Since mortgage transfer involves a third-party buyer, he or she has no contractual obligations to fulfill to the lender and has not been subject to either a credit check or income verification.
When can mortgages be transferred?
In order to transfer a mortgage, one must first determine whether the mortgage underwriting permits this transaction. If allowed, the lender must verify that the new holder of the mortgage possesses a solid credit history and adequate income to make loan payments on time; a lender will not transfer a mortgage to someone who is less qualified or able to pay off the loan than the current holder. Initiating a transfer of mortgage can be easier if you have an FHA or VA loan, though, it is still challenging.