Lease/Assumption Option

Lease/Assumption Option

Life sometimes brings floods — job loss, medical bills, divorce, or death. And on top of those floods might come thunder in the form of missed mortgage payments.

It’s natural to feel sad and confused when those overdue notices from your mortgage company start streaming in. As the storm rages, you might ignore the problem, hoping it’ll just fade away. Or maybe you start to believe that the only solution is to lose your home.

But then, a sliver of sunlight carries a question to your mind — “Can I avoid foreclosure?”

The answer is a resounding “yes.”

Receiving a notice of foreclosure ranks high among the worst pieces of mail you will ever receive. But failing to take the appropriate action can create a situation that’s far worse for you.

A lease/assumption allows a qualified buyer to take over your mortgage debt and make the mortgage payments. (NOLO)

How the Lease/Assumption Option Works

Many homebuyers typically take out a home loan from a lending institution to finance the purchase of a home. The contractual arrangement for repaying the loan includes the principal repayments to the lender as well as the interest that you must pay.

If you decide to sell your home later, you may be able to transfer your mortgage to the homebuyer. In this case, the original mortgage you took out is assumable.

Loan assumption is the process whereby someone else adopts or takes over your debt and obligations under the terms of the existing mortgage. (Legal Information Institute) This includes the interest rate, repayment period, insurance, property taxes, current principal balance, and any other contractual terms of the seller's mortgage

Loan assumption presents an alternative way to sell a property to a buyer. This option could prevent you from facing a short sale or pending foreclosure. With an assumption, the buyer takes title to the property and assumes the payments due on the home loan without obtaining new financing.

Mortgage assumption is not as seamless as taking over a seller’s mortgage since the lender has to approve the new buyer before signing off on the assumption. An assumption may be negotiated with the lender in such a way that you’re completely released from any obligation and the new owner becomes responsible for the loan.

The process can be simplified as follows:

• Determine if the loan is assumable – You first need to consult with your lender to see if the mortgage might be assumed and, if so, under what terms and conditions. Some lenders have loan assumption packages to assist in such a transaction. Even if the loan wasn’t negotiated to allow an assumption, your lender might be willing to modify the mortgage and consent to an assumption instead of dealing with the costly process of foreclosure. As always, any lender agreements or modifications should be made in writing, detailing terms and conditions.
• Send the Assumption Request to the Lender – You’ll need to send the assumption request to the lender plus the corresponding government entity that guarantees your mortgage. It’s probable that they will both charge a small fee for this service.
• Seller scrutiny – As with any transaction, your lender may want to know of other obligations and liens on the property before any listing or sale. In addition, you must be up to date on your mortgage payments. It is necessary for them to know this information when setting a price. With this knowledge, the amount of equity, if any, can be determined.
• Advertise – The possibility of a loan assumption can be used as a strategy to increase the marketability of your home.
• Buyer scrutiny – The lender will review the buyer’s credit history, credit score, income, and debt-to-income ratio. (Yahoo Finance)
• Assumption approval – Even if a buyer may be considered creditworthy to take on the payments, mortgage investors (FHA, VA, Fannie Mae, Freddie Mac, etc.) have to approve the assumption. If a loan assumption is made without approval, you risk paying the full remaining balance upfront.
• If the lender approves the transfer, the buyer closes on the home just like any other buyer and becomes the sole borrower on the loan.
• You will ask the lender for a release and walk away from any future liability on the mortgage. It’s vital to note that you must get that release signed by the lender. If you don’t, you could be on the hook for any payments the buyer misses.

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Who Is This Option Good/Not Good For?

You may consider a lease/assumption option if you can no longer afford your mortgage payment and you’ve exhausted all options to remain in your home.

What Are the Types of Mortgage Assumptions?

There are two main types of mortgage assumptions:

Simple assumption – This is a private transaction between you and the buyer that doesn’t involve the mortgage lender. There are risks associated with simple assumptions as the transaction has not been approved by the bank, like the buyer failing to make payments or breaching the mortgage contract.

Novation agreement – Here, you notify your lender of your intent to allow another individual to assume the mortgage. The mortgage lender participates in novation and agrees to the full transfer of liability from you to the buyer. The buyer must often meet the lender's income and credit requirements before it will transfer the mortgage liability.

Which Mortgages Are Assumable?

Unfortunately, most conventional mortgages are not assumable. These are mortgages originated by lenders before their sale in the secondary mortgage investment marketplace.

However, loans insured by the FHA or backed by the USDA or the Department of Veterans Affairs (VA) are assumable.

Buyers who wish to assume a mortgage must meet specific requirements and obtain approval from the agency sponsoring the mortgage.

For instance, if a buyer wants to assume an FHA loan, they’ll need a credit score of at least 580 and to put down a minimum of 3.5 percent. To assume a USDA loan, you have to meet income limits and location requirements and have a minimum credit score of 620.

How Will I Know Whether My Mortgage Is Assumable?

To determine if your home loan is assumable, look for an assumption clause in your mortgage contract. This provision is what permits you to transfer your mortgage to a buyer.

Remember that if a mortgage lender allows an assumption, they will typically hold the new borrower to the loan’s eligibility requirements.

Works Cited

"Legal Information Institute." 12 2021. assumable mortgage. <https://www.law.cornell.edu/wex/assumable_mortgage>.

"NOLO." n.d. Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage? 13 11 2022.

<https://www.nolo.com/legal-encyclopedia/avoiding-foreclosure-can-someone-else-assume-take-over-the-mortgage.html>.

"Veterans Benefits Administration." 7 2 2008. PROCESSING TRANSFERS OF OWNERSHIP UNDER VALERI .

<https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_08_3.pdf>.

"Yahoo Finance." 4 8 2021. How to avoid foreclosure now that the national moratorium has ended.

<https://finance.yahoo.com/news/avoid-foreclosure-now-national-moratorium-232500244.html#:~:text=If%20you%20are%20eligible%20to%20use%20an%20assumption%2C%20your%20lender%20will%20assess%20the%20new%20buyer%E2%80%99s%20financial%20history%20to%20make%20sur>.

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