Can we assume a mortgage?

Here’s the question on how to assume a mortgage…

“We have a son that can no longer afford the mortgage payment and thought we could assume the mortgage on their home. We thought he might have an assumable mortgage. I know that was possible once upon a time. What is the procedure for assuming a mortgage. Will I have to pass a credit check or any other qualifying?”

You are right in believing “once upon a time” this “non-qualifying” mortgage assumption was possible.

But sadly, assumable home loans were eliminated a few decades ago.

All conventional mortgages, both first and second, have been non-assumable since 1989. FHA assumable loans were converted to “qualifying assumable” if they closed after December 14, 1989. VA assumable loans received the same treatment if closed after March 1, 1988.

“Qualifying assumable” means a credit check and all the other mortgage approval guidelines exist to assume the mortgage loan. Additionally, it’s up to the lender / servicer to “approve” your assumption request, and with them so bogged down with foreclosure mitigation requests, I doubt an assumption is high on their list of priorities. So unless your son has a mortgage from before 1989, you must purchase the home from your relative with a state approved Purchase and Sale Agreement just as if you didn’t know them using a new loan.

Most likely, you must then get a new mortgage as part of the “normal” home buying process. During the mortgage approval stage you will have to disclose the relationship you have with the home sellers, since they are relatives.

It is what as known as a “non arm’s length” transaction…and it would be loan fraud not to disclose it.

However, you could run into problems if your son lives in the same town, since the type of loan would come into question. Are you expecting to move to the new property? If not, the mortgage could not be considered a vacation home unless your son lives in a resort location at least 50 miles away.

And given that, the only option left is an investor mortgage. Investor mortgages are more expensive and harder to qualify for. You will have to qualify for the new mortgage with your current income and debts allowing only 75% of the local gross rents to offset the mortgage. There is an impugned 25% loss for vacancy and expenses. Would you qualify under these tight conditions?

Maybe…maybe not.

You son’s best option is try to fight to keep the house….if at all possible and if the current loan terms are favorable for a long term hold. Maybe you could help out with the mortgage payment until he gets back on his feet.

Or if there is equity and the loan terms are not conducive to a long term hold (ie. variable rate, balloon payment, etc.), he could sell.

Or if his local rental market is strong enough to cover the payment, he could rent it. And if there is a small short fall, you could help out there.

So you see, even with your good intentions, it is not as simple as you’d think to the change in assumable mortgages. Buying the home from you son with a new mortgage is the last and best option.

Thanks for the question,

Good Luck!

Author: The Mortgage Insider

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