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Warning

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One option that homeowners facing foreclosure rarely consider is allowing a buyer to assume their mortgage loans and relieve them of the burden of making a mortgage payment each month. Before you start actively searching for someone willing to take your mortgage off your hands, however, you should be aware of some of the dangers that accompany transferring your mortgage to someone else.




The Due-on-sale Clause


The majority of mortgages contain clauses stipulating that, should the borrower transfer the property title, the entire balance of the loan is due immediately. The purpose of the “due-on-sale clause” is to prevent borrowers from transferring mortgage loans to less qualified buyers. Less qualified buyers are more likely to default on the mortgage loan and cause losses for the lender.


Another reason for the due-on-sale clause is to force individuals to seek their own mortgages. Banks charge high fees for originating loans. When buyers assume existing loans rather than applying for their own mortgages, banks lose these fees along with any additional interest they could have charged on a new loan. Only a handful of government-backed mortgage loans, such as VA loans, remain assumable and the new owner must meet the lender’s qualifications to take over the mortgage.


Mortgage Loan Liability


A successful transfer doesn’t necessarily mean that you can walk away from your mortgage free and clear. Unless your lender agrees to the mortgage assumption and transfers all liability for future payments to the buyer, you may still be legally responsible for the mortgage payment.


Many unfortunate individuals don’t understand this fact until they check their credit reports and discover that the new owner has made a series of late payments that have, in turn, adversely affected their credit. Even worse, if you live in a state that allows lawsuits for deficiency balances, you may just find yourself in court, defending your assets from being seized following a home foreclosure you knew nothing about.


Keep in mind as well that if the mortgage continues to appear on your credit report as your liability, this directly affects your debt-to-income ratio and can prevent you from qualifying for a new mortgage loan.


Lease-to-Own Agreements


In the event that you need to move, yet cannot or will not sell your home, you have the option to rent out your residence. While renting is permissible, if your mortgage lender prohibits assumptions, it may view a lease to own contract as a threat.


When you offer a borrower a lease-to-own agreement, you agree that you will put rent payments you receive toward the total purchase price of the home. In the eyes of some mortgage lenders, this constitutes a mortgage assumption. Should your lender discover the lease-to-own agreement, it may consider this a violation of the due-on-sale clause and demand that you immediately satisfy your total remaining loan balance. If you cannot afford to pay off the mortgage, your lender can then foreclose on your home.


Losing Equity Through a Mortgage Assumption


If you’ve owned your home for many years, you’ve probably built up substantial equity over time – especially if your home’s value has increased. You can demand that anyone interested in assuming your mortgage compensate you for the equity in your home, but the more equity you have, the harder it will be to find someone willing and able to “buy“ your home‘s equity.


People with large amounts of cash lying around are typically qualified buyers and, if interested in a home, would prefer to use their extra cash as a down payment on a traditional mortgage rather than hand it over to you in a mortgage assumption. Those most often interested in assuming a mortgage are those who, for whatever reason, cannot qualify for mortgages of their own. These people are unlikely to have the assets to adequately compensate you for the equity in your home.


Thus, if you want to make a mortgage assumption work, you’ll likely have to sacrifice at least a portion of your home’s equity in the process. This can leave you losing thousands of dollars in equity that’s rightfully yours.



If a mortgage assumption seems like your only option to escape a home loan that you can no longer afford, call your mortgage lender and make certain it allows mortgage assumptions. If your lender permits assumptions, it can send you information about the process and what qualifications your buyer must meet in order to assume your home loan. Before jumping headfirst into an assumption agreement, however, evaluate your other options. A mortgage assumption may just be more trouble than its worth.