Mortgage Assumptions – are they making a comeback?

by Chetan Patel

Mortgage Assumption Agreement is a contract by which a potential buyer of a property may take over an existing mortgage on the property rather than securing their own financing. Technically, all mortgages are potentially assumable; however, most lenders, especially those of conventional loans with Private Mortgage Insurance, try to prevent the assumption of a mortgage with a due on sale clause within the note. Mortgages guaranteed by Federal Housing Authority (FHA), Veterans Administration (VA) or United States Department of Agriculture (USDA) are irrefutably assumable. In spite of the due on sale clause, assumptions are explicitly allowable on certain mortgages based on the Garn–St Germain Depository Institutions Act of 1982. The most common cause of this is when a title transfers to a new owner after death or divorce through assumption.

Mortgage assumptions typically become attractive in an environment of rising interest rates. When a potential buyer of a property is unable to qualify for a mortgage at the market rate, they may want to assume the existing borrower’s mortgage that has a locked interest rate and desirable payment terms. With the current trend of rising interest rates, mortgage loan servicers are experiencing an increase of requests for approval of mortgage assumptions. However, due to the historically low interest rates in recent years coupled with the corresponding unpopularity of the assumption product, loan servicers, lenders, and mortgage holders now lack the skill sets or the resources to tackle mortgage assumptions in-house.

There are two types of assumptions: Qualified Assumptions and Name Change and Title Transfer Requests.

Qualified Assumptions are those where the assumer of the mortgage needs to qualify for the loan they wish to assume. The process is similar to the issuance of a purchase mortgage. A qualified assumption may allow the release of liability of the original note holder subject to the new borrower’s ability to meet the lender’s qualifying criteria.

Name Change and Title Transfer Requests are simple modifications of the original mortgage agreement that release liability. Examples of such changes are name changes of the borrowers, removal of deceased borrowers, and removal of divorced spouses per a divorce decree. A Name Change and Title Transfer Request is simply an administrative change that retains the original mortgage and does not release the liability of the original mortgage.

Federal Housing Authority (FHA) Assumptions

The assumption process of an FHA loan is dependent on the origination date of the loan. For FHA loans that were originated before December 1, 1986 a potential buyer may assume the loan as-is without having to re-qualify. However, if the loan originated after that date, it falls in the category of “Credit Worthiness Assumption Process” which means that the potential buyer must re-qualify for a new FHA loan based on current loan approval criteria. One caveat to this rule is that FHA mortgages executed between 1986 to 1989 contain language that is unenforceable due to later Congressional action. According to guidance from FHA these loans are also freely assumable, despite any restrictions to assumability as stated in the mortgage.

According to the guidance provided in HUD 4155.1.7, to start the processing of the release of liability on an assumption, the lender, or their designated approved servicer, must fill out form HUD 92210 (Request for Credit Approval of Substitute Mortgage). Further, execution of form HUD 92210.1 (Approval of Purchaser and Release of Seller) constitutes a formal release of liability. Only the originating lender can execute the release of liability.

The qualified lender must determine the creditworthiness of the borrower wishing to assume the loan per FHA standard mortgage credit analysis requirements. A Direct Endorsement (DE) lender, and their DE certified underwriters can act as an approved authorized agent to process assumptions. Alternately, supervisory lenders with an approved authorized agent relationship may authorize their DE underwriters to credit qualify the new borrower. The FHA requires that the assuming borrower pay down the outstanding mortgage balance to a 75 percent loan-to-value (LTV) ratio if the current owner-occupant requires a release of liability off the mortgage.

Veterans Administration (VA) Assumptions

Veterans Administration loan assumptions require the new borrower to re-qualify for the loan if was when origination occurred after March 1, 1988. Also, the original owner or the buyer must pay 0.5 percent of the existing principal balance as a funding fee to VA for processing the assumption.

According to VA Pamphlet 26-7, loan servicers with automatic authority are authorized to process and determine creditworthiness on assumption approval requests on behalf of VA. The VA underwriting guidelines must be followed per the VA lenders handbook, the same as a new purchase money mortgage. At the conclusion of the assumption, the servicer must electronically notify the VA of the authorized ownership transfer and approve the release of liability. Servicers without automatic authority servicing loans for holders with automatic authority must advise the holders of the assumption approval requests and the holder is responsible for the qualification process. If neither the servicer nor the holder has automatic authority, the servicer must ask for a complete credit package from the borrower. The package is then submitted, along with the purchase contract and the status of the loan, to the loan production center at the VA regional loan center for underwriting and approval.

If the person assuming the loan is another veteran with an adequate VA loan entitlement, then the process is simplified. The new borrower’s entitlement is substituted for the current borrower’s entitlement thus releasing the current borrower from the loan. This process releases that amount from their entitlement and applies the assumed loan amount to the new borrower’s entitlement.

United States Department of Agriculture (USDA) Assumptions

USDA allows the assumption of section 502 loans subject to the eligibility of the new purchaser. Most assumptions of section 502 loans are new rate and term assumptions in which the purchaser assumes responsibility for the unpaid principal balance of the loan and brings to the table the current equity in the property as a down payment.

In limited cases, the USDA will allow an assumption of the existing note’s terms, including the same rate and term assumption. Further, the purchaser does not have to qualify and prove income eligibility, creditworthiness, or ability to repay the loan.

In conclusion, the major driving force that will make assumptions popular again is the rising interest rate environment. New borrowers may want to assume the existing mortgage with more favorable rates and terms than what they can qualify for with a new loan. Servicers, lenders, and mortgage holders must be prepared to tackle loan assumption requests efficiently as volumes of these requests increase.

Chetan Patel – is a Mortgage Banker with 20+ years of experience in operations and senior technology with mortgage lenders and outsourcing companies.  He is a serial entrepreneur with a track record of building several highly successful outsourcing and technology ventures in the mortgage banking and financial services spaces.