Life throws all kinds of curve balls. A major event like divorce or an unexpected health crisis can create money difficulties. If your finances have taken a hit, you might not qualify for a home loan. Traditional mortgage loans aren't the only path to home ownership, however. Mortgage assignments and assumptions can help buyers and sellers alike. With a little creative financing, you still might be able to buy -- or sell -- a house.
Assumption Loans
An assumption loan preserves the original mortgage terms while transferring the mortgage note from one person to another. The former owner won't be on the hook for the balance if the new owner defaults. Not all lenders allow assumption loans, but FHA and VA loans are assumable. Assumption can be a good choice in a divorce if the couple had a good interest rate and one spouse wants to retain favorable mortgage terms while releasing the other person from liability.
Due on Sale
Most private mortgages contain a due on sale clause, which allows the lender to demand the entire balance if the loan is sold or transferred. Federal law carves out some exceptions to this rule. Under the Garn-St. Germain Depository Institutions Act of 1982, lenders can't call a loan due in situations like divorce or a transfer to a widow after the death of the other spouse. Even if your loan has a due on sale clause, your bank might still allow a new buyer to assume your loan with the interest adjusted to current rates.
Mortgage Assignment
Mortgage assignments are often confused with another type of transaction called a subject-to agreement or a purchase subject to a mortgage. Simply put, a mortgage assignment occurs when one bank sells a loan to another. This happens relatively often, with investors selling off large groups of mortgages to be serviced by another lender. If your bank assigns your mortgage, it must notify you in writing and let you know where to send your payments.
Subject-to Agreements
If handled properly, a subject-to agreement can be an effective way to buy or sell a house. It is not without pitfalls, however, and should be used carefully. Typically, parties to a sale choose this arrangement when the buyer can't qualify for his own home loan. He takes over the seller's mortgage payments and the seller signs over the deed. If the lender isn't told and later discovers the transaction, it can enforce the due on sale clause. The buyer forfeits the money he has paid into the home, and the seller might be left owing the entire balance.
References
- The Mortgage Professor: Are Mortgage Assumptions a Good Deal?
- Womans Divorce: Understanding Your Divorce Mortgage Options
- The Washington Post: When a Lender is Restricted From Calling a Mortgage Due
- Cornell University Law School: 12 U.S.C. § 2605
- International Law Office: Court Invalidates Foreclosures Based on Ineffective Mortgage Assignments
- Manausa & Associates: Is a Mortgage Assignment Sale the Solution for Buyers With Bad Credit?
Writer Bio
A.M. Hill has been a licensed attorney since 2004. Her practice areas include family law and divorce, probate and estate planning and bankruptcy. Hill holds a Juris Doctor from the Cleveland-Marshall College of Law.