ENCEL REAl ESTATE INC.
ASSUMABLE LOANS
"This method of seller financing is risky if the underlying first loan has a "due on sale" clause because the loan might be called due when the first lender becomes aware that the property has transferred title,
A seller will usually want to incorporate a late charge to encourage the buyer to make monthly loan payments on time.
"A buyer will probably want to stipulate that prepayment of the loan be without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller ...
"Most sellers prefer to have a due on sale provision included in the note, but this can be a negotiable item. Buyers who are concerned that they might be forced to sell during a period of high interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer's credit report and financial statement," Hymer writes.
When the buyer formally assumes the loan, the lender looks primarily to the assuming borrower for repayment,
With a "subject to" transfer, the seller may still be primarily responsible for payment. A "subject to" transfer may also involve an additional risk to the buyer, since most lenders will only permit an existing loan to be taken over through formal assumption and could start foreclosure proceedings following a "subject to" transfer if the note contains a valid "due on sale clause,
Look to your loan agreement for specific terms.
In addition, people in this situation should candidly discuss any risks with their lender.
People with concerns may want to consult an attorney before signing the agreement.
FHA loans originated prior to December 1, 1986, are freely assumable, which means a buyer can take title subject to the mortgage without the lender's approval, in which case the seller remains liable for repayment of the mortgage debt. Assumptions with release of liability are granted only if the assumptor is creditworthy and willing to execute an agreement to assume and pay the mortgage debt.
Some FHA loans originated between Dec. 1, 1986 and Dec. 15, 1989 contain language that is not enforced due to later Congressional action. Such loans are now freely assumable despite any restrictions stated in the mortgage, the "Bluebook" states.
FHA loans originated after Dec. 15, 1989, contain due-on-sale clauses, which means they can only be assumed by a buyer found creditworthy who executes an agreement to assume and pay the mortgage debt. "Realty Bluebook" says lenders cannot refuse release of liability if an acceptable borrower assumes the loan.
The due-on-sale clause is triggered whenever an owner's name is deleted from title, except when that party's interest is transferred by devise, descent, or in other circumstances where transfer cannot legally lead to acceleration of the mortgage debt.
"Two methods can be used. One is a simple assumption that allows the loan to be assumed without notification to the FHA ... The other method is a formal assumption that requires FHA approval of the new buyer.
Look to the loan agreement to determine if it is assumable by someone else. Then talk to the lender about specific requirements based on the value of the home.
Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment.
Plus, today new assumable loans are almost always adjustable rate mortgages.
Here's why: If the fixed rate is below market rate, the lender will continue to lose money if the loan is assumed. In this situation, the fixed rate assumable does not work well from the lender's point of view.
If the fixed rate is over market rate, the new buyer of a property with a fixed assumable loan won't want to assume it, assuming that he or she can qualify for market rate financing.