Financial difficulties or life changes might require a co-borrower to assume sole responsibility for a jointly financed home. A refinance is the most common way to get out of a shared mortgage responsibility, but you might have another, less expensive option – loan assumption. To assume a loan, you might need to prove that you can afford the loan on your own, and you must continue making payments as scheduled.
The Federal Housing Administration and the Department of Veterans Affairs allow qualified co-borrowers to assume loans. The FHA and VA guarantee the loans, though private lenders fund the loans. Conventional loans made by banks and traditional mortgage lending companies can also be assumed under certain circumstances. A loan assumption on a government or conventional loan makes the most sense for co-borrowers who want to keep favorable loan terms, such as a below-market interest rate, or that have loans that are almost paid off. Just keep in mind that lenders charge a fee for loan assumptions.
Conventional Loan Assumption
A 1982 federal law prohibits lenders from requesting loan payoff when a borrower dies or divorces. The co-borrower or heirs have the right to assume a conventional loan without triggering a "due-on-sale" clause. This is a condition of most loans if ownership transfers. It stipulates that the full balance of the loan can be called due upon the transfer. To assume the co-borrowed loan in your own name, you must keep up the payments and provide the lender with proof of your co-borrower's death or your divorce.
FHA Loan Assumption
FHA allows loan assumptions on many of the loans it insures. An assumption is harder to carry out on FHA loans made after the late 1980s, however, and the loan must be at least a few years old before you assume it. A co-borrower who assumes a loan made after Dec.1, 1986 must meet credit and income requirements, much the same way you do when initially applying for a mortgage.
VA Loan Assumption
The co-borrower assuming a joint VA loan must have VA eligibility. This means you have sufficient military active-duty or reserve experience, or otherwise be entitled to this veteran benefit. A co-borrower can assume a VA loan made after March 1, 1988 if she gets the department’s approval. The VA lender then releases the co-borrower who wants out from future financial responsibility.
Covering All of Your Bases
Your co-borrower might remain responsible for the loan if you default. Co-borrowers should consult the FHA, VA or conventional lender to determine exact requirements for loan assumption and get a release of liability for the departing borrower. If you assume the loan for reasons other than divorce or death of the co-borrower, you also must make sure that the assumption doesn’t violate a due-on-sale clause.
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