I'm with Peter on this. In the rare instance that a government backed loan is assumable, it must be approved by the lender. You can't "just do it". In addition, the buyer of the property must still come up with the money to pay the seller for their equity in the property. Let's say the property is worth $400,000 and there is $300,000 remaining on the loan. Even if the buyer is able to assume the loan, they must still come up with an additional $100k + closing costs in order to take ownership of the home. They might be able to obtain secondary financing, but that will need to be accounted for in the first lender's decision to allow assumption.
In addition, a Vet that allows a civilian to assume their loan is taking on added burden and risks:
Impacts on VA Loan Entitlement
For VA homeowners, the big consideration with allowing an assumption is their VA loan entitlement. If the person assuming your loan is a Veteran with sufficient VA loan entitlement, then you can ask them to formally substitute their entitlement for yours on that mortgage. Otherwise, the entitlement you utilized to purchase the home will remain tied up there until the loan is fully repaid.
Failing to get a substitution of entitlement can limit your 0% down purchasing power when it comes time to reuse the VA loan benefit. It's also possible you wouldn't have enough entitlement remaining to reuse the benefit at all.
VA homeowners also lose that portion of their entitlement entirely if the assumer later experiences a foreclosure or short sale.
In other words, allowing a civilian to assume your VA loan can affect your future use of the VA loan benefit. For some homeowners, that's a risk worth taking. Others ultimately decide to allow for assumptions only to Veterans substituting entitlement or to pursue a traditional home sale.
Source: https://www.veteransunited.com/valoans/va-loan-assumption/
Why on earth would any home seller wish to take on those risks for a stranger? For their own kid, maybe, but how often do we see kids buying homes from parents?
USDA loans cannot be assumed if the seller is delinquent on payments.
A mortgage that has been assumed by a third party, regardless of lender, does not mean that the seller is relieved of the debt payment. The seller may be held liable for any defaults which, in turn, could affect their credit rating. To avoid this, the seller must release their liability in writing at the time of assumption, and the lender must approve the release request releasing the seller of all liabilities from the loan.
As for Arthur's suggestion of an "agreement" between buyer and seller to take over payments on the current mortgage. There are a number of risks involved with that idea - which is vague, if I'm being honest. Some mortgages have clauses that require the home to be used as the primary residence of the borrower and a lender could call the whole thing due if they were to find out that this is no longer the case. Sometimes that is only true for a period time, it depends on the loan. To the best of my knowledge, the second the title transfers to a new owner any lender with a "due on sale" clause, can call the entire loan due immediately and foreclose if it's not paid. Should a borrower/seller allow the buyer to make payments directly to the lender, they would have no idea if the buyer were delinquent or late, which would impact the seller's credit. Continuing to have a mortgage in their name would reduce their ability to obtain future financing, especially depending on the nature of this "agreement". A future lender may not consider those payments from the buyer as income that could off-set the dept to income ratio. Even in the case where a valid lease or lease-purchase agreement were signed and recorded on public record, the income from a "rental" unit only off-sets debt in the debt to income ratio after it's aged. A person could not enter into a lease or lease-purchase agreement with a buyer, move out, and immediately expect to be able to borrow a large sum to purchase their new home. The new rental income might not be permitted by the lender as income.
And this brings me to the topic of leasing your home or entering into a lease-purchase agreement which is the only potentially valid and legal "agreement" I'm aware of that a seller could enter into with a buyer, that could allow for the transfer of the benefit of a low interest mortgage payment, when the loan itself is not assumable. A lease purchase agreement leaves title and loan in the name of the seller. Seller vacates the property and the buyer is permitted to move in. They may need to make a large down payment, they may not, it depends on how the deal is negotiated. If the seller has a lot of equity, a large down payment would allow the seller to capture that equity for the purchase of a new home or other investments. Buyer then begins making regular monthly payments to the seller in the form of "rent". Generally a portion of those rent payments will be credited toward the future purchase price of the home. The buyer is generally required to obtain their own financing and complete the purchase transaction within a set timeline - often several years. Should the buyer stop making payments or fail to qualify for and obtain the proper financing to complete the transaction within the timeline, the seller cannot simply "cancel the agreement." The buyer lives in the property and all local eviction rules and processes apply. In addition, depending on the details of the agreement, it could be possible that as part of the eviction, the seller would need to return some portion of the payments to the buyer, which they may or may not be able to afford at that point in time. During all of this, the seller's credit is still tied up in this property limiting their ability to borrow money for their own needs - mortgages, car loans, college loans. If the buyer is delinquent, the seller must come up with the shortage and make the mortgage payments or risk their own credit score - just like any landlord would. And again, short of a family relationship, you aren't going to see people willing to take on these administrative burdens, tax reporting requirements, and financial risks to give a stranger the benefit of their good interest rate. Most especially if the interest rate they'd get on their new home will be so much higher. Unless there is a profit potential, I don't see why they would do this.
The only way to take profit out of the equation, whether it is profit for the individual or the lender, is to remove the profit motive from our economy entirely. And now we're talking about socialism or even communism, and I'm pretty sure that's not the solution you're suggesting.
And of course, any seller who does wish to enter into such an agreement, needs an attorney. And not just any attorney. A really, really, good one with extensive experience in local real estate.
As a title agent, I went to court to testify in a suit over a lease to purchase agreement that went bad. The agreement itself was terribly worded with loop-holes galore. The buyer was in possession of the property, had complied with all terms, and was ready to complete the purchase. Part of the agreement had allowed the seller continued use of some of the land and 2 out-buildings during the lease. The seller didn't want to lose the use of those buildings and tried to back out of the deal entirely. The buyer ended up having to take the seller to court where I had to testify. The court ordered the seller to complete the transaction. Day of settlement came and the seller didn't show. We had to go back to court a second time where the judge had to compel the seller to complete the transaction, yet again. Complicating matters further, because there was no title insurance or survey done at the time of the lease contract and I'm good at my job, we encountered a problem in the legal description that ultimately required a separate quiet title suit to be brought to court which resulted in the buyer relinquishing a 2 foot wide tract of land that may or may not actually belong to him, because that was easier than getting a dozen adjoining properties re-surveyed and tracing back their titles for 200 years, in order to sort out who actually owned which square feet of land. AND as if all of that were not enough, the buyer was getting an FHA loan which then required quite a few extensive repairs to be made to the property. The property had fallen into a state of disrepair because it was unclear within the terms of the lease purchase who was financially responsible for those repairs and who had the right to make the repairs.
So, I'll once again come down on the position that while the idea of mortgage assumptions seems like a very quick and easy fix to a very large and growing housing affordability problem, once you dig into the legalities and financial impact of it all, the simplicity gives way to vast complexity and risk for all parties. There are no winners in this idea. And ultimately, it does not fix the underlying socio-economic problems at the root of our housing affordability problem, which I won't get into again here. (if you have any interest, that post is here: https://community.alta.org/discussion/stay-in-your-lane#bm6f3a9069-7ee0-47e0-8ad1-018ae12f0cd5)
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Stay Wicked my Friends,
Cheryl, your sales and marketing coach at www.Cheryl.wTf
Wicked Title Forum
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cheryl.evans@carnanco.info
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Original Message:
Sent: 10-18-2023 09:15
From: Arthur Schwartz
Subject: Assumable mortgages
Good morning! I wanted to add a new item to a post which I had made a few weeks ago, about lenders allowing their mortgages to be assumable, and not invoking the "due on sale" clause. This is a fairly simple solution which would encourage more transactions in today's housing market.
Since my previous post, I have observed a couple of start up companies which are now allowing buyers to do just that, limited to certain types of mortgages backed by FHA, VA, or USDA. I won't mention any names of these start up companies, to avoid any potential conflict of interest, but a search on the internet will turn up several websites.....
Another possible solution is for the buyer to have an agreement with seller to take over payments on the current mortgage, without changing the seller's name on the mortgage. I am not clear on whether the deed changes names, and that may vary by state. If buyer does not make those payments, then seller can cancel the agreement. It's legal, if properly prepared by an attorney........Arthur