It’s no secret that mortgage lenders have seen a sharp decrease in origination volumes over the past two years. Higher interest rates coupled with a shortage in housing inventory translate into a market environment where origination volumes are likely to remain depressed for the near future.   

The mortgage industry must explore different avenues for revenue generation and one path is to capitalize on the growing attention regarding mortgage assumptions. While current market conditions have made it difficult for homebuyers to find affordable housing options, particularly first-time homebuyers, the abundance of existing loans with low interest rates makes this the ideal time to tap into and re-energize the assumption market.

What is an Assumption

With an assumption, someone other than the original borrower assumes an existing mortgage loan and walks away with a mortgage rate significantly lower than what is currently available in the market. Once the transaction is completed, the buyer steps into the seller’s (original borrower’s) shoes and assumes legal responsibility for the payments and in accordance with the terms of the original loan. The seller (original borrower) is then typically released from all liability under the mortgage and is no longer responsible for the payments.

For a potential buyer interested in assuming a seller’s existing mortgage, the creditor will still need to evaluate the assuming buyer’s creditworthiness before moving forward with the assumption. It is important to note that a servicer evaluating a potential buyer for credit eligibility may be considered a lender under certain state licensing statutes and will need to determine whether it needs additional licensing to process an assumption. Whether special licensing is required will vary from state to state.

Other Contexts Where an Assumption Makes Sense

While market conditions today are ripe for the use of assumptions in a home purchase, there are additional scenarios which benefit from the use of assumptions and those are inheritances and divorces. In these “successor-in-interest” types of assumptions, the creditor is typically not required to confirm the creditworthiness of the spouse or surviving heir awarded the property before approving the assumption. Just as in the case of a purchase, the assumption will allow the individual taking over the mortgage to assume the legal obligations subject to the terms of the prior-existing loan.

Only Certain Mortgage Loans Can Be Assumed

Unfortunately, not all mortgages are assumable. Most government-backed loans are assumable if the buyer (successor) meets certain creditworthiness standards. VA loans can even be assumed by individuals without the usual military service requirements with the only caveat being that the seller will not have his/her VA entitlement restored in order to buy another home with a VA loan unless the person assuming the loan is an eligible service member, reservist, veteran, or surviving spouse.

Conventional mortgages, however, are typically not assumable because of “due-on-sale clauses” which allow the lender to demand payment of the entire outstanding loan amount when the property is sold. There are, however, certain exceptions.  Fannie Mae, which oversees most conventional loans, may permit the waiver of due-on-sale clauses and allow assumptions in the case of delinquent mortgages or certain adjustable rate loans. In addition, successor-in-interest assumptions are permitted even for conventional loans due to the provisions of the Garn-St. Germain Depository Institutions Act which prohibits lenders from exercising their option under a due-on-sale clause in scenarios of inheritance and divorce as well as transfers by operation of law on the death of a joint tenant or tenant by the entirety. 

The Technical Requirements for Assumption

Because the individual is assuming an existing loan, there will not be a new note or security instrument when documenting a mortgage assumption. The assuming borrower will execute an Assumption Agreement which identifies the original promissory note and security instrument, states that the new borrower is assuming all obligations under the original loan documents and that lender approves the assumption.

If a Loan Estimate and Closing Disclosure are provided, they must disclose only the obligations applicable to the new borrower (successor). Whether a Loan Estimate and Closing Disclosure are required depend on whether the person assuming the loan was an obligor on the original note. 

• If the person assuming the loan was already an obligor on the note (for example, he/she is a co-borrower with his/her spouse; or he/she is getting a divorce and assuming the entire loan), there is no requirement to provide a new Loan Estimate and Closing Disclosure. 
• If the individual assuming the loan is not already an obligor on the note, a Loan Estimate and Closing Disclosure is required.

See CFPB Facts:  Are Loan Estimates and Closing Disclosures Required for Assumptions

Due to the complicated and unique nature of assumptions, it is important to use a document provider that possesses the requisite subject matter expertise. The Propel™ document platform has assumptions in its document library and the Propel support team remains up to date on all the relevant rules and requirements.  If you have any questions regarding assumptions or any of Propel’s other capabilities, please contact Franci Webster at fwebster@asurity.com.  

By Diane Jenkins,
Director, National Mortgage Regulatory Compliance, Propel;
Partner, Sandler Law Group