When you assume a loan, you assume all the details of that loan. You take over the owner's interest rate, repayment period, balance and other terms. The previous owner's name is removed and your name takes the place. Assuming a loan was popular in the 1980s, when interest rates were high. Although the requirements have changed since then, assuming a mortgage is still a desirable option for some.
Types of Assumable Loans
For conventional mortgages, assuming isn't an option because of a due-on-sale clause. If a due-on-sale clause is present, the lender can require the owner to pay off the entire loan balance when ownership changes hands. Loans backed by the Federal Housing Administration and U.S Department of Veterans Affairs are assumable.
Depending on when the FHA loan was originated, the buyer may need to meet minimum requirements to qualify. If the loan was originated before Dec. 1, 1986, the buyer can assume the loan through the "simple assumption process," which doesn't require approval from the FHA. Although buyers don't need to qualify for a simple assumption, the buyer and lender will need to work out the details. According to HUD, mortgages executed between 1986 and 1989 are also fully assumable, despite any restrictions that may be stated in the mortgage. Loans taken out on or after Dec.15, 1989, are subject to credit approval through the "creditworthiness assumption process". The minimum credit score requirements will vary depending on the lender. Fortunately for buyers with less-than-perfect credit, the FHA has flexible credit requirements. In addition to the credit check, the lender may also verify income and employment.
If the loan was originated before March 1, 1988, it may be assumed without approval from the VA or the lender. If the loan was originated after March 1, 1988, the buyer must get approval from the VA. The buyer is subject to credit and income requirements. You don't have to be a veteran or service member to assume a VA loan. However, if the buyer is a civilian, there's a catch for the seller: The VA loan must be associated with a veteran's entitlement. The seller won't have the ability to use the entitlement to buy another home unless the buyer is a veteran using her own entitlement.
Even though an assumable mortgage takes off the previous owner's name, it doesn't necessary remove his liability. If you don't make the payments, the seller's credit score could suffer. The bank could also go after the seller for what it can't recover from you. The former owner can ask the seller to release his liability as part of the assumption process.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.