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.

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.

References in periodicals archive ?
Invensys plc announces today the sale of its air and liquid filtration business, Vokes, to McLeod Russel Holdings plc for a cash consideration of (pound)8 million, plus the assumption of mortgage liabilities of (pound)2.
The declines in coverages are attributed to GLB's assumption of mortgage debt through acquisitions in 1998 and the use of secured debt to pay down an unsecured bridge facility and reduce borrowings under its revolving line of credit.
30, 1998, and are to be financed through a combination of cash from existing sources, the assumption of mortgage financing and the placement of new mortgage financing as necessary.
00 per share, as well as $4,200,000 in cash and $5,100,000 in assumption of mortgage indebtedness.
ASE:LPF) Friday announced that it has signed a nonbinding letter of intent to sell to Security Capital Industrial Trust (SCI), a publicly traded real estate investment trust, all of the real estate it owns for a price of approximately $75 million, which will consist of about $69 million in cash plus the assumption of mortgage debt for the balance.
3 million of limited partnership units of Dundee Industrial Limited Partnership, which are exchangeable for units of Dundee Industrial REIT, and the assumption of mortgages.
On the expense side, total expenses increased by $1,430,000, or 35%, quarter over quarter, as a result of an increase in depreciation and amortization due to the ownership of additional properties, an increase in interest on mortgages payable as a result of the origination of three mortgages, the assumption of mortgages in connection with the purchase of two properties and penalties incurred in connection with the prepayment of two mortgages which had above market interest rates, and an increase in interest on our line of credit in connection with the purchase of several properties.
The deposits are non-refundable except if consents to the assumption of mortgages, third party financing commitments or estoppels are not obtained with respect to certain of the properties to be acquired under the Sale Contract or if certain other contingencies occur.
The price is payable through the assumption of mortgages on these properties with the balance payable in cash.