When you buy a new car or home or even lease a rental vehicle, you sign a document called a promissory note. By signing this form you enter into an agreement whereby you promise to pay another party a sum of money over a set period of time. Many people think you cannot break a promissory agreement without incurring late fees and penalties. In many instances this holds true. But certain promissory notes are assumable, which means you can pass your debt onto someone else.
Mortgages insured by the Federal Housing Administration and the Department of Veterans Affairs are assumable. This means you can arrange to turn your home and mortgage over to someone else prior to the end of the loan term. The terms of the loan remain unchanged, meaning the buyer simply picks up where you left off. Mortgage assumptions are subject to credit approval. You can only pass on your loan to someone who meets the lender's eligibility criteria. Also, while the FHA and VA allow loan assumptions, the lenders that actually originate the loans are free to include clauses preventing loan assumptions.
When you lease a vehicle you sign a promissory note. This note typically includes clauses allowing the dealer to assess fees and penalties if you drive too many miles or fail to carry out the necessary maintenance. You also have to pay lease termination fees if you trade the car in early. You can get rid of the car and avoid these fees if the lease agreement includes an assumption clause. The new buyer holds the car for the remainder of the term. Specialist brokers arrange lease assumptions between drivers, and you can find a new owner if you are willing to pay the broker's fees. Just be sure to read the fine print to ensure the dealer has no recourse against you if the new lessee reneges on the debt.
Corporations issue promissory notes to raise cash to cover short-term costs. Some of these notes are assumable and end up being traded on investment markets in the same way that debt instruments such as bonds are traded. A broker might offer you promissory notes as an alternative investment if you are not getting the kinds of returns you want on stocks and bonds. However, unscrupulous individuals sometimes operate fraudulent schemes in which non-negotiable or falsified promissory notes are sold to unsuspecting investors. Only enter into a loan assumption agreement through a reputable broker or dealer.
Promissory assumptions can benefit both parties if the buyer can gain access to something more easily through assuming a debt rather than taking on a new loan or lease. People who assume mortgages avoid the upfront closing costs associated with a home loan. An assumption of a car lease might make sense to someone who wants a certain type of car for a limited period of time. Promissory notes as a whole are subject to state contract laws. When in doubt, consult an attorney before attempting to enter into an assumption arrangement. You do not want to give someone your home or your car only to find out that the assumption agreement holds no water under your state's laws.