assumable loan

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Assumable Loan

A mortgage that the borrower may transfer to another party. That is, upon the sale of real estate with an assumable loan, the seller (who is the borrower) lets the buyer take over the mortgage, which allows him/her to buy the real estate with the same terms as the original loan. Most VA and FHA loans are assumable.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

assumable loan

A loan that can be taken over by a purchaser, who may then continue making payments in the same amount,at the same interest rate,for the remaining term of the loan.

History and background: Before the high interest rates and banking crises of the 1980s,most mortgage loans were freely assumable if the purchaser paid a small assumption fee.Problems arose when interest rates skyrocketed to nearly 20 percent,creating a lively market in people wishing to assume old 6 and 7 percent loans rather than obtain new purchase money loans at 20 percent.The lending industry also began to see a high percentage of non-credit-worthy purchasers, unable to obtain financing on their own, assuming loans. This all seemed good for consumers, but it was bad for lenders.Caught in the squeeze,many went under in the giant banking and savings and loan debacles of the era.To prevent future interest rate squeezes, and future underwriting disasters, lenders introduced a new loan clause called the due on sale clause.It stated that if the underlying property were sold or otherwise conveyed,the entire note would be due and payable immediately,even if it had not matured and there had never been a single default or late payment.California led the way of states antagonistic to this attempted infringement on consumer rights and outlawed the enforceability of due on sale clauses.The federal government, facing gigantic cash losses as a result of its lending industry bailouts,was strongly in favor of due on sale clauses so the current crisis would not repeat itself in the future.It passed legislation preempting states laws in the case of all federally chartered or federally insured (FDIC) financial institutions.The new law stated that due on sale clauses were enforceable and state laws to the contrary did not apply.The ability to assume mortgage loans is now effectively dead.

Today, some loans are still characterized as assumable, but the purchaser must meet all underwriting requirements necessary for an original loan, and the interest rate can usually be increased to market rates.In a true loan assumption,the original borrower remains liable on the promissory note, in addition to the purchaser of the property.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.