Mortgage Assumption When Selling a Home & Legal Obligations
A mortgage assumption may be a useful tool for homeowners who are willing to leave their home after missing payments on their mortgage. This involves selling or otherwise transferring the property to a new owner, who then takes over the mortgage and the obligation of making payments under it. The new owner must comply with all of the terms of the mortgage, just as the original owner did, and the mortgage servicer has the same obligations toward the new owner that it did toward the original owner.
Some mortgages will state explicitly that the mortgage can be assumed if the homeowner transfers the property to someone else. Even if the mortgage contract does not address this issue, state laws generally provide that a mortgage can be assumed. However, the new owner will need to establish their eligibility to assume the mortgage and get approval from the lender. This involves passing a credit check and providing proof of employment, among other things.
Due-on-Sale Clauses
A key situation in which a mortgage might not be assumed is when the contract includes a due-on-sale clause. This states that the full balance of the loan will become due as soon as the home is transferred to a new owner. Due-on-sale clauses have become increasingly prevalent in mortgage contracts.
The federal Garn-St. Germain Act carves out some exceptions to the enforceability of a due-on-sale clause. These include transferring the property from a parent to a child or transferring it from one spouse to the other. The Garn-St. Germain Act also negates due-on-sale clauses in property transfers related to a divorce or legal separation, or to the death of the original borrower if a family member receives the property. While the Act is a federal law and thus preempts most conflicting state laws, it does not apply in a few states that enacted their own due-on-sale clause restrictions during the three-year time period provided by the Act.
Even if you have a due-on-sale clause, the lender may not necessarily enforce it. Sometimes a lender simply wants an assurance that it will receive regular payments from someone, and it may not matter who that person is. A lender also may be open to a mortgage assumption if the property is underwater, such that its value is less than the remaining balance on the loan.
Mortgages Already in Default
If the foreclosure process is already underway, the new owner of the property also may face a foreclosure after the property transfer unless they can catch up with payments. They may be able to reinstate the loan by paying back the missed payments as a lump sum. Or they may be able to agree on a loan modification or a repayment plan with the lender. Special options may be available when Fannie Mae owns the loan.
Pursuing the Original Owner After a Mortgage Assumption
You should be aware that you still may be liable under the promissory note attached to the loan after the property transfer. Sometimes the lender releases the original homeowner entirely, but more often it does not. If state law allows, the lender can pursue you for this debt if the new property owner fails to keep up with monthly payments. This is a type of deficiency judgment, although it should not be confused with a deficiency judgment after a foreclosure sale.
