Having Someone Take Over Mortgage Payments
Periodically, we will have PAYERS on notes call us about selling their notes rather than having the note holder (seller) contact us, as is more normal. These payers are often confused about terminology like assumable loans, owner financing, due-on-sale clauses, or changes to a note after that note is sold. Assumable loans and assumable mortgages are completely different from note selling, though there are corner cases in which a note holder might let the borrower swap out for a different person.
Taking Over Mortgage Payments And Assumable Mortgages
As an example, let’s assume that Sammy Seller still owes $200,000 to a bank on a house that he wants to sell. His current interest rate is 2.50%. Bonnie Buyer wants to buy the house but cannot afford the payments at a higher market rate of, say, 6.50%. If the loan is assumable and the lender agrees, Bonnie can “step into Sammy’s shoes” and make payments at the lower interest rate. Here, this is a win-win, as Sammy was able to more easily sell the house and Bonnie gets to have the lower rate and, therefore, smaller monthly payments.
The advantages of assumable mortgages are mostly reflected in the above example. The buyer is able to save money with their future payments and the seller of the house is able to successfully sell the house. In addition, the buyer can usually save on the cost of an appraisal, which can run several hundred dollars. Finally, if the seller has financial issues that prevent him or her from making the payments, having someone else assume the payments can help avoid a default and possible foreclosure.
Disadvantages of Assumable Loans
- The first thing to know is that assumable mortgages are hard to find. Nearly all conventional loans are not assumable. Most lenders include a due-on-sale clause in their loan documents, which states that the loan must be paid off in full if either some or all of the asset is sold. The good news is that many loans insured by the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), and the Department of Agriculture (USDA) can be assumed if certain requirements are met. These requirements may include a minimum credit score, an analysis of the payer’s debt-to-income ratio, confirmation that the buyer is going to live in the house, and the need to still go through the lender’s application process. The lender may also want to do a verification of assets, get a history of employment, and require details about the buyer’s income.
- The seller may be liable if the new buyer defaults on the loan or transfers ownership to another person or entity.
- For VA loans, the seller may lose their entitlement if there is a default. For this reason, sellers should obtain a release of liability from the institution.
- Buyers must conform to the terms of the original loan, which may not fit their financial situation.
- The buyer will need to either come up the cash or take on a second loan to cover the difference between the existing loan amount and the purchase price. For instance, if the property is sold for $500,000 and the unpaid balance of the existing loan is $300,000, the buyer would need to come up with the other $200,000.
A VA home loan is available to qualified borrowers as a military benefit. They can be used by current and veteran service members, as well as by eligible spouses. The loan is issued by a financial institution like a bank but is guaranteed by U.S. Department of Veterans Affairs. Typically, there is no down payment required, and VA loan rates are often lower than for conventional loans.
The Federal Housing Administration also does not give loans, but rather insures loans for the banks. Because the loan is safer for the banks, they can offer lower interest rates and down payments (even 3.5%), as well as making it easier for the borrower to qualify. The loans are even available for mobile homes and factory-built housing. FHA loans are especially attractive for first-time home buyers. There are certain borrower requirements, such as having to live on the property (can’t be used for investments) and moving in to the property within 60 days of closing. Most of the time, the borrower will have to buy mortgage insurance if their down payment was less than 10%.
As the term states, a subject to mortgage is subject to an existing mortgage. That is, the seller of the property isn’t paying off their existing mortgage note, but rather having the new buyer of the property take on the obligation. The original mortgage and note stay in place, so the seller of the property is still liable to the lender. The buyer of the property will usually make payments to the seller, who will then make payments to the lender. Although the buyer doesn’t assume the loan, they have control of the property and have the deed. The terms of the transaction may be different from what the seller has with the lender.
Reasons for the buyer to buy a property subject to include taking advantage of a low interest rate or because the buyer does not have strong credit. Both parties can also avoid most normal closing costs like title fees and perhaps broker commissions.
There are certain costs that the buyer and seller of a property must pay, though there can be renegotiation on some of them. The closing costs are listed in a document called a settlement statement, which is sometimes called a closing statement or a HUD-1. A typical settlement statement shows:
- The names and addresses of the parties
- The sales price, down payment, earnest money, and mortgage note amount
- Title and escrow charges, including recording fees and transfer charges
- Fees paid to realtors/brokers as commissions
- Property tax amounts due and pro-rated portions
- Pro-rated insurance and possibly other items
A good mortgage note buyer like Seascape Capital doesn’t charge fees for buying a note, and will pay all normal closing costs, including the appraisal and title policy charges.
What Happens To The Payer If A Note Is Sold?
As noted earlier, assumable loans are a separate category from owner financed loans. When a property is sold using owner financing and the note holder later sells all or part of the note to a mortgage note buyer, what happens to the payer on the note? The short answer is … nothing. The note buying company cannot legally or ethically change the payment, the interest rate, or anything else. The due dates for payments and the default provisions must also remain the same. The note buyer is simply taking over the mortgage loan from the original seller.
Of course, the payer may have to send their payments to a new address. However, if the note is being serviced by a 3rd-party and the servicing stays in place, the payer doesn’t even have to worry about that.
In summary, assumable loans have no relationship with owner financing. Since they are an important part of real estate financing for some people, it is wise to have an understanding of assumable loans and how to take over another person’s payments.