Assumption of mortgage

Mortgage assumption is the conveyance of the terms and balance of an existing mortgage to the purchaser of a financed property, commonly requiring that the assuming party is qualified under lender or guarantor guidelines. All mortgages are potentially assumable, though lenders may attempt to prevent assumption of a mortgage loan with a due-on-sale clause. Certain mortgage types are irrefutably assumable, such as those insured by the FHA, guaranteed by the VA, or guaranteed by the USDA. As of 2014, FHA and VA assumable mortgages make up approximately 18%, or one out of every six, mortgages in the United States.

For example, a homeowner owes a 30-year mortgage loan of $250,000 against his house. A prospective buyer wants to purchase the house for $300,000 and keep the same mortgage in order to avoid going through the process and expense of applying for a new loan. The buyer pays $50,000 cash for the equity and assumes the $250,000 mortgage, becoming liable for the debt.

In order to assume an existing mortgage loan it is generally necessary to obtain consent from the lender prior to the assumption process. Transfer of property with an existing mortgage loan that is made without the lender's consent is sometimes referred to as a sale "subject to" the existing loan. In most cases, this type of transfer does not avoid the lender's right to call the loan due under the due-on-sale provision in the loan.

Upon completion of the assumption, the seller requests a release of liability from the lender. If the mortgage is assumed without the lender’s consent, the seller would remain liable for any default on the part of the buyer. In cases of a VA Loan, a release of liability may be obtained after the assumption even if the lender’s approval was not given prior to the completion of the assumption process.

In the United States, mortgage assumption of most types of mortgages is restricted by including a due-on-sale clause. This type of provision permits the lender to require payment of the full loan balance if the property is transferred to a new owner without the lender's consent. However, all FHA insured loans and VA loans (dated after March 1, 1988) are assumable as long as the buyer is creditworthy because they intentionally lack due on sale clauses.

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