Transferring a mortgage between family members can be an easy, legal way to bypass many of the requirements of the traditional selling process, but there are pros and cons that you should know about.
If you want to take over a mortgage from a family member, but would like to avoid the hassle of refinancing or starting the entire loan application process from square one, there are certainly ways to do that.
But, as always when it comes to real estate matters, there are rules and laws that govern this process, and to successfully transfer the loan, you'll have to understand what you can and can't do.
Here are five tips that cover some of the most important aspects of the mortgage assumption process.
Know What Kind of Mortgage You're Dealing With
Before you try to assume your family member's mortgage, you should research what type of mortgage it is.
Some types of loans — FHA loans and VA loans, to cite two examples — can be smoothly transferred between individuals with very little trouble. These two types of government loans don't even require the second, newer party to go through a financial application and approval process.
Other mortgages are not often so generous with their terms. Many institutions explicitly bar loan assumption, and will insert a due-on-sale provision, or an acceleration clause, that requires the seller to pay off the loan when the property leaves their hands.
This can be a significant obstacle to the loan transfer, but there's good news – depending on your circumstances, federal law may require your bank to let you assume your family member's mortgage.
Know the Law
The Garn-St. Germain law allows heirs, spouses, or ex-spouses of homeowners to assume their mortgages even if the lender has inserted a due-on-sale provision into the loan agreement. This prevents a widow or ex-spouse from losing their home if they can't gain approval for financing.
The law also covers loans that are part of an inheritance.
Consulting with a lawyer or an experienced real estate professional is the best way to determine if you're covered by this federal law.
You'll Still Have to Make a Down Payment
Just because the mortgage is going to smoothly change hands without the usual closing costs doesn't mean you don't have to come up with a down payment.
Traditionally, when someone assumes a mortgage, the second party pays off the original borrower's equity in the form of a cash down payment. Let's say the original borrower took out a mortgage in the amount of $400,000 and has since paid it down to $320,000.
In the typical situation, the second party would be expected to pay the original borrower a down payment of $80,000 in cash for their equity.
Refinancing Isn't Necessarily a Bad Thing
One of the biggest advantages of assuming a loan is that since interest rates are steadily climbing, assuming someone else's loan with the original terms intact can translate to huge savings over time. (This is also why so many lenders don't allow assumption.)
But there are circumstances in which refinancing might make sense.
Let's say you have better credit than the original family member who took out the loan; refinancing may actually get you a lower interest rate. And the lower monthly payment you're looking at will likely offset the fees and expenses of a refinance.
This is also something to consider if the original borrower agreed to terms like an adjustable interest rate or a balloon payment.
Though it will cost you money — typically 2% to 5% of the loan balance — refinancing could also give you a much better position.
What Kind of Assumption Are We Talking About?
There are two main kinds of loan assumption. A simple assumption means that you take on your family member's mortgage, but if you quit making payments and default on the loan, the original borrower — i.e. your family member — is the one who's on the hook, legally.
The second kind of loan assumption, known as novation mortgage assumption, involves the lender in the process.
The lender gets to scrutinize and approve you before allowing you to assume the loan, but if you stop making payments, you're the one responsible. The original borrower — the family member who let you assume their mortgage — is off the hook.
These two approaches have their pros and cons. The simple loan assumption is, well, simpler, since it doesn't include the lender in the process. However, it does leave the original borrower with some liability, since they're essentially acting as your guarantor.
The novation mortgage assumption is cleaner since all liability is transferred to you, the second party. However, since it includes the lender, it could run into delays, problems, or even outright rejection.
In the end, you'll want to discuss the question with the family member who took out the original loan before you decide on how to assume the loan. You might also want to consult a real estate professional who can advise you. Clever Partner Agents work at major brands and are all top earners in their markets; there's no doubt they can answer any questions you might have about the assumption process.