At first glance, a transferable mortgage sounds like a great deal for buyer and seller. For the buyer to simply take over the seller's mortgage, rather than apply for and close on her own, can shorten the time to closing and save the buyer money. Be warned, however, that transferable mortgages have some pitfalls, and they can be difficult to find.
Transferable Mortgage Defined
A transferable mortgage, called an assumable mortgage by industry professionals, is a loan that one party can transfer to another. The lender puts the loan in the transferee's name; the transferee takes responsibility for repayment under same interest rate and other terms the original borrower had.
Most mortgage loans are not assumable because they contain a "due on sale" clause calling for immediate repayment of the loan in the event that the owner sells the home. The formal term for due on sale is "acceleration" -- the lender accelerates the repayment schedule to collect the full balance immediately upon resale. The seller repays the mortgage lender at closing, from the proceeds of the sale.
Assumable Mortgage Options
Although few conventional mortgage loans are assumable, some government-backed loans can be transferred. Many FHA loans, which are insured by the Federal Housing Administration, lack the due-on-sale clause that makes most loans not subject to transfer. Loans guaranteed by the Veterans Administration (VA) are often assumable, too. Whereas VA loans originated before March 1988 could be assumed without the lender's approval, newer VA loans and FHA and other assumable loans require that the buyer apply for the assumption. This ensures that buyers who assume mortgages have sufficient credit and income to qualify for their loans.
It's important to weigh the ease of selling a home to a buyer who assumes the seller's mortgage against the risk to the seller. Assumption documents often contain the stipulation that the seller is responsible for repayment of any deficiency in the event the buyer defaults on the loan and the lender forecloses and sells the home for less than the buyer owes. You can protect yourself by allowing an assumption only if the lender releases you from this liability.
Although a mortgage assumption eliminates some of the costs associated with originating a new mortgage, the lender is likely to charge the buyer an assumption fee. The buyer must also pay other closing costs, such as an appraisal fee and title insurance premium.
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