When Someone Else Takes Over The Mortgage

Divorcing couples can sometimes avail themselves of the provisions of the federal Garn-St. Germain Depository Institutions Act of 1982 and transfer the responsibility of a mortgage to a new party.

The Garn-St. Germain Act exempts transfers resulting from a divorce or legal separation from any due of sale clause provisions that exist in some mortgages. Thus, a couple can sidestep the need of a complete refinancing of the mortgage.

When a borrower fails on mortgage payments, one possible option to avoid foreclosure is a mortgage assumption, which transfers responsibility for payment to a new person who makes the monthly payments and complies with other terms and conditions (interest rate, principal balance, and monthly payments) of the existing loan.

When the mortgage contract states that the mortgage is assumable, then a borrower can transfer the property and mortgage to a new owner. If the mortgage contract is silent on this matter, in most states, the mortgage is considered assumable. 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.

Most lenders require that the new owner qualify for the mortgage and go through an approval process in order to assume the mortgage. The lender will run a credit check on the buyer, as well as verify the buyer’s employment and income.

The Mortgage may not be assumable because of a due-on-sale clause, which provides that if the property is sold to a new owner, then the  loan balance is accelerated and the entire balance  must be repaid. A due-on-sale clause in a mortgage means the debt cannot be assumed.

In addition to transfers resulting from a divorce or legal separation, the federal Garn-St. Germain Depository Institutions Act of 1982  prohibits enforcement of the clause in certain transactions that include a transfer from a parent to child, a transfer to a relative upon the borrower’s death, and a transfer between spouses.

Moreover, sometimes a lender will forgoe the enforcement of the due-on-sale provision if it means a steady stream of payments from someone, or if the current market value of the property is less than the outstanding indebtedness (the house is “underwater,” as they say) and the purchaser makes the difference in cash.

In assuming a mortgage that is in default, the new borrower must “cure the default” by either paying the amount in full or negotiating to pay on the past-due amounts in a repayment plan or as part of a loan modification under a program such as HAMP. The Federal Home Affordable Modification Program (HAMP) has comprehensive rules for how loan providers (the company you make your mortgage payment to) should handle the transfer of title issue upon death, divorce, and similar circumstances. If the loan is in default at the time of assumption, Fannie Mae requires loan providers to evaluate the new owner for a workout option such as HAMP, a standard modification, mortgage release, or short sale if the due-on-sale clause is unenforceable.

In some assumptions, the lender may release the original borrower from his or her obligation on the promissory note, however, in most cases, the original borrower remains liable on the note. This means that, depending on state law and the circumstances of the particular case, if the new owner stops making mortgage payments at some point in the future and goes into foreclosure, the lender may come after the original borrower for a deficiency judgment to collect the debt.

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