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If you are facing possible foreclosure and you have decided you cannot get caught up and stay in the home, you may have the option of offering the assumption of your loan to qualified buyers. The concept of loan assumption is defined as taking over a loan from a previous borrower. The buyer takes title of the property and the mortgage payment. This involves all the same obligations of the original loan with only the borrower changing hands. In this article we will discuss changing your loan to ease restrictions that may be in place to prevent assumption, who you can talk to concerning assumption of your loan and where to find qualified buyers.
When you find yourself facing possible foreclosure, all options need to be on the table. Doing something will always be better than doing nothing. With that said, you need to be aware of the complexity of assumption, the fees involved and the hazards. Most loan officers would likely advise you not to take this route but in some situations it can make sense. There are two types of loan assumptions. There is a qualifying assumption in which the buyer must meet creditworthiness or a non-qualifying assumption in which they do not. Lets assume that you have a 30 year-fixed mortgage with equity of around $15,000 in your home. If you were to offer your loan for assumption the buyer can take over the terms of your loan and in addition pay you $15,000 to cover the equity you own or split the difference. The more equity you have the harder it will be to find qualified buyers who have the cash lying around to make a large payment. The one plus for buyers is if your loan has 26 years left on it they have a bit of a head start toward owning the home.
The advantages for a buyer taking over a loan are: if the interest rate is lower that rates they could obtain on their own, if the equity payment is less than 15% or if they have credit issues preventing them from qualifying on their own. Also the terms of the loan, meaning fixed or adjustable rate, matter greatly. If it is an adjustable rate mortgage, buyers are looking at risky territory. On the other hand the fees associated with a loan assumption are smaller than the closing costs on a new loan.
Chances are your lender has built restrictions into your contract that forbid another borrower to assume your loan. There is rarely a way around these restrictions without refinancing or convincing your lender to change the terms of your loan. There are differences between private lenders and FHA/Veterans loans. Generally FHA/VA loans are fully assumable/non-qualifying as long as they were signed prior to 1989. There are exceptions to this rule but for the most part these loans are assumable with some restrictions and most require buyers to qualify.
Private lenders likely have much more strict assumption clauses that will be difficult to overcome. Once your lender is aware that there is a chance you will default on your loan leading to foreclosure you might have a bargaining chip. It is possible to convince some lenders to alter your contract to allow assumption under strict circumstances. They will only let you do this if you offer a qualifying assumption and the potential buyer has good credit and would qualify for a typical mortgage offer. Generally speaking the lenders end up as the losers in this process so don't be surprised if they are resistant to the idea and end up shooting it down. They may allow you to go ahead but only if the new buyer pays the current interest rate instead of your lower rate. Often this erases one of the great benefits of loan assumption for the buyer.
At this point, let's be clear about one of the shady options available to the seller. One option that some have used is to make a deal outside the knowledge of the lender, but in this case you are putting yourself at tremendous risk. This is often referred to as a simple assumption. Even if the person paying your mortgage is family or friends your name remains on the mortgage and the liability for it is 50% yours. You could be included in a lawsuit if the buyer defaults on the loan. It is important that you review all your contracts and paperwork with an attorney so you know just what to expect. Beware the pitfalls of such an arrangement. The law will not be on your side when you attempt to circumvent your lender with outside contracts and deals. Your contract with your lender will always trump any written deal you make outside the contract with the lender. The only way to release you from liability is to have a signed agreement with your lender that states such an agreement. You should only move forward if you have this kind of agreement with your lender and you understand all that is involved.
So when does offering loan assumption make sense? Really the ideal circumstance is if you need out quick, there is a shortage of traditionally qualified buyers and your loan is not restricted. When you fall outside these circumstances you may be looking at a process that is more trouble than it is worth. It will involve attorneys' fees and time to understand the process and fees.
You can make an appointment with a HUD housing counselor to go over your personal information and decide if loan assumption is in your best interests. The HUD counselor can help you negotiate with your lender to alter your loan if possible. HUD counselors are familiar with the many situations homeowners are in and can offer a wealth of advice.
Finding a qualified buyer puts us in questionable territory. If buyers can qualify for a mortgage, where is the incentive to assume your loan? The incentives would be a lower interest rate and shorter terms. Really the stars need to all line up to make the offer worthwhile to qualified buyers. You can find qualified buyers by advertising in your local newspaper and online. If you glance through the real estate section of your newspaper, you will likely see offers for loan assumptions in there right now. Chances are these are buyers that have not had luck with selling there home outright. They need to offer a loan assumption to draw in people who would benefit from such an arrangement.
Getting down to brass tacks here, homeowners must make it worth the while of buyers to settle for this kind of arrangement. There has to be a deal worked into the offer of loan assumption. The savvy buyer will, with some research, sniff out loan assumptions that only serves the seller. There is no point to the whole process unless the buyer is getting one heck of a leg up to home ownership.
The good news is that loan assumption is not off the table but it will require a lot of work. The first step you should take is contacting your lender and inquiring about the restrictions that are probably in place within your original contract. Ask about your particular lenders policies toward assumption. With the current marketplace in a state of disarray, lenders may be more open to options that keep your home out of foreclosure. If your lender refuses to cooperate in adjusting your loan to allow assumption that is pretty much the end of the road for the idea unless you want to refinance with another lender that will allow it. In a new loan they may require you to hold the loan for two years before you can utilize the assumption option.
If you are able to jump through the hoops and get the assumption deal done, you need to be sure you keep a close eye on all the paperwork. There have been instances in the past that collection agencies come after the original loan holder so you need to be able to prove that the loan was assumed and that the lender released you from liability, in case the buyer defaults .
If you are facing possible foreclosure and assumption is the only way out, it is not impossible and is not always hazardous. As long as everything is in writing, cleared through your lender and you are released from liability in case of loan default it may be a good option. You need experienced people on your side helping you avoid the common mistakes involved with loan assumptions. This is too big a deal not to. Contact your lender today and ask about the restrictions, gage their willingness to alter your contract to allow it and speak to a real estate attorney to ensure all the possible gaps are filled.
If you are able to accomplish all the necessary changes to your contract and start to move ahead with a loan assumption offer remember to keep the deal attractive to attract the most buyers so you can avoid foreclosure and hopefully walk away with some equity.
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