Taking Over Payments with Pre-Foreclosures
There are times when buyers are interested in buying a pre foreclosure and assuming the seller’s mortgage rather than getting their own new mortgage. This is often the case when the home is underwater, meaning that the amount owed on the property is more than the market value. At times, a buyer is still willing to purchase the property by assuming the mortgage, rather than dealing with a short sale within foreclosure process. Another reason buyers consider a mortgage assumption is that the terms on the original loan are much better than current market rates.
But how does one go about taking over the payments when they are buying a pre foreclosure property? What are the requirements to be approved for a mortgage transfer? What are the benefits and the risks of assuming another person’s mortgage? What are some situations where mortgage assumptions occur? All these questions will be answered below.
How to know if the bank will allow a buyer to assume the mortgage?
In order for a buyer to assume the mortgage on a property, they must first make sure that the loan has been structured to accept a transfer. You should get a copy of the mortgage contract from the seller. Carefully examine the contract to see if there is a clause that allows a buyer to take over the payments.
Lenders often include a clause that prohibits mortgage assumption. It is called a “due on sale” clause. Upon the transfer of title, most loans are due in full at that time. On the other hand, government loans such as VA (Veteran Administration), USDA (United States Department of Agriculture) and FHA (Federal Housing Administration) are often transferable.
Even if the loan documents state that the loan cannot be transferred, you may want to still contact the lender to see if they will waive this restriction. A bank may consider transferring the mortgage to a qualified buyer if they see that the seller is unable to continue making the payments on the loan; they are attempting a short sale; or the property is in the middle of a foreclosure.
Some buyers have attempted to hold off recording the sale of the property and then just continue making the seller’s payments. This circumvents the “due on sale” clause but it can create large problems down the road. First, the buyer does not legally own the property until the transfer is recorded. Second, the seller remains liable for the mortgage in the event that the buyer does not pay on time or defaults.
How does a buyer take over the payments on a pre-foreclosure home?
Assuming a mortgage is not simply a matter of the seller handing over the keys and you just take over making the payments. There are several areas that need consideration:
- Is there any equity in the property? If there is a difference between the market value of the home and the balance on the mortgage, the property owner will usually expect you to pay the difference. Usually the payment must be made in cash. Some sellers will accept payments (plus interest) or the buyer can get a second mortgage.
- All real estate transfers should be accompanied with a signed purchase agreement that is prepared according to the guidelines set by the state.
- A new deed must be prepared to transfer ownership. It is highly recommended that the transfer be done through a Warranty Deed rather than a Quit Claim deed. The closing should be handled by a title or escrow company and include a title search – just like a traditional real estate purchase. Note that a transfer of ownership does not transfer the liability on a mortgage note.
- The buyer must also be approved by the lender in order to assume the mortgage.
If you find that the loan allows a buyer to assume the mortgage, you will want to contact the lender and request an assumption package. This will spell out the requirements set by that lender.
What are the requirements to be approved to take over the payments on a home loan?
Qualifying to assume a mortgage is nearly the same as qualifying for a traditional loan. You must have decent credit, a good payment history and the ability to generate enough income to meet their debt to income ratios. FHA loans are the easiest to qualify for a loan assumption.
You will probably be required to submit a mortgage application, a signed purchase agreement, proof of funds and proof of income including W-2s, paycheck stubs and bank statements.
What are the benefits and risks of assuming a mortgage?
Before you consider taking over the payments on a mortgage, it is important to understand the reasons why a buyer would consider assuming a mortgage on a foreclosure home and why many would never consider this as an option:
Benefits of Assuming a Mortgage
When you take over the payments on a mortgage, the time it takes until you completely own the property free and clear will be less than if you begin a new 30 year mortgage.
The closing costs are much less when you assume a loan then when you get your own mortgage. The fees that are not paid when you assume a mortgage include appraisal fees, agent commissions, mortgage points plus the closing costs on the loan itself are much less.
Assuming a mortgage can be a good move if there is very little equity in the property. Rather than having to come up with a 20% down payment on a traditional purchase, you may be able to take over the payments with little to any out of pocket money.
The most important reason that a buyer would consider assuming a mortgage is when the interest rate on the original loan is less than the market rates.
Risks of Taking over Payments on a Property
If the interest rate on the assumed mortgage is higher than the market rate, you must continue to pay the higher interest rate. If the mortgage is an Adjustable Rate Mortgage (ARM), then your payments will change as the interest rate changes.
Lenders that allow a buyer to take over the payments on a mortgage may charge a mortgage assumption fee of 1 – 2% of the mortgage balance.
You are also held to the repayment schedule. If you want a 30 year mortgage but the original loan was set as a 15 year, you must pay based on the 15 year amortization schedule. The same would hold true if the payments are made on a bi-monthly basis or if the payment is due on an inconvenient day of the month.
When you take over the payments on a loan, you are also stuck with the servicer on the original loan. Some banks are easier to deal with than others.
If you are taking over a VA loan, you must either qualify as a veteran or be in active service. If not, then the VA loan entitlement stays on the property and the seller is not able to get another VA loan until this one is paid off. If you default on a loan which has the seller’s entitlement, this could adversely affect the seller’s ability to reuse the entitlement in the future.
The biggest reason why buyers are unable to assume a mortgage is that buyers must qualify under the same requirements as a traditional loan. If a buyer lacks sufficient credit and income to qualify for a traditional loan, he or she will most likely not qualify to assume a mortgage either.
Situations where a mortgage assumption is a good idea
In most cases, it will be a better decision to get your own mortgage rather than assuming the payments on an existing loan. There are some cases, however, where getting a mortgage assumption is common:
- A family member needs to move out of their house (i.e. job change, care facility, assisted living) and is willing to allow their children or grandchildren to take over the payments but they remain on the deed and the mortgage. Usually some sort of agreement is created such as a will or life estate.
- There is a divorce and one mate is willing to release their interest in the home in exchange for transferring the mortgage into the other spouse’s name.
- Your parents die and leave you their home but the home has a mortgage. Under the 1982 Garn-St. Germain Law, you can legally take over the payments.
- The owner has little equity in the home and is facing foreclosure on a government backed loan. The interest rate on this loan is less than market rates and the owner is willing to lose some or all of their equity in order to stop the preforeclosure process.
If you are seriously considering taking over the payments on a mortgage, make sure that you consult the lender and possibly even an attorney that specializes in real estate to make sure that it is in your best financial interests to do so and that you can meet the requirements set by the lender.