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Can Buyers Make Assumptions?

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Posted On: 09/15/2010

QUESTION:

Is it still possible to buy property with a mortgage assumption or buy it “subject to” the loan?

ANSWER:

Long ago, it used to be that mortgages were “freely” assumable. You could take over someone else’s mortgage because there was no requirement for the replacement borrower to qualify with the lender.

As an example, I once purchased a property with 10 percent down. The owner took back a loan equal to about 40 percent of the purchase price, and assuming an existing loan took care of the rest of the purchase.

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Freely assumable financing ended with FHA loans originated after Dec. 15, 1989, while the VA stopped free assumptions for loans made after March 1, 1988. Most conventional lenders also stopped originating freely assumable loans around the same time. By now, any remaining loans that are freely assumable have either been paid off, refinanced or have balances so small an assumption makes little sense.

Today lenders typically allow “qualified” assumptions, if they permit assumptions at all. With a qualified assumption the prospective new borrower must pass muster with the lender. However, the lender is not required to approve an assumption request, so it’s not a sure deal.

As mentioned, property also can be purchased “subject to” the loan. This means that approval of the lender is not sought.

The catch is that when something goes wrong with an assumption a lender will try to go after both the replacement borrower and the original borrower. With a sale “subject to” the mortgage the original borrower remains liable – but not the new borrower.

If there’s a change of title with property bought “subject to” the mortgage, the lender will likely invoke the loan’s “due-on-sale” clause and immediately call the loan. At this point the original seller has debt but not title and the situation can get very messy, very quickly.

If someone suggests buying your property “subject to” the loan, please see an attorney before signing anything.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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