The process of taking over a parent's mortgage is known as an assumption. When you assume a mortgage, the interest rate and other terms remain the same. You'll take over the payments and ownership is transferred to you. Your ability to take over a parent's mortgage depends on several factors, such as the type of loan, the origin date of the loan, your credit history and whether your parent is alive or deceased.
Understanding the Due-on-Sale Clause
If you're interested in taking over a parent's mortgage, you'll need to look over the loan documents to determine if that's a possibility. Look for a due-on-sale clause, which states that if the property is sold or transferred without the lender's consent, the lender can demand full payment of any outstanding balance. This clause prevents the majority of loans from being assumable.
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Checking on Assumable Mortgages
Conventional loans generally are not assumable. Only loans backed by the Federal Housing Administration, U.S. Department of Agriculture and U.S. Department of Veterans Affairs loans may be assumed. Even then, you'll still need approval from the lender before you can legally take over the loan. If you have poor credit or an insufficient income, it may deny your request for taking over a parent's mortgage.
Considering Exceptions for Inherited Homes
The Garn-St. Germain Act of 1982 specifies situations when a due-on-sale clause can't be enforced, even if the mortgage contains it. Under the act, if a relative inherits the home and intends to live in it, the due-on-sale clause can't be triggered when the title is changed. If you inherited your parent's home, you can keep the mortgage in your parent's name without making any changes, or you can assume the mortgage. You'll need to notify the lender of the death and likely will need to provide a copy of the death certificate.
Taking Over Parents' Mortgage
Mortgages that originated before December 1989 for FHA loans – or March 1988 for VA loans – are fully assumable, which means you won't have to meet any requirements. Your parent simply will need to inform the lender that you want to start the assumption process. In some cases, it's as simple as submitting a signed form. For more recent loans, you'll need to prove you're creditworthy with a suitable credit score and history of making payments on time.
Further, USDA loans have some specific requirements and require that the USDA approve the assumption. For example, the mortgage needs to be in good status, and the person assuming needs to meet the USDA's income, debt ratio and minimum credit score requirements.
Lenders typically have an assumption packet for you to complete, with an application similar to what you would fill out for a refinance. You'll need to submit pay stubs and W-2 forms, bank statements, and an identity affidavit. You'll also have to consent to a credit check.
Considering Mortgage Assumption Fees
Fees may apply and vary by lender and the type of loan, but are generally less than typical closing costs. A rule of thumb is to expect to pay a maximum of 1 percent of the mortgage amount you're assuming. For example, as of 2021, Bank of America mentions that its fees for a mortgage assumption are between $562 to $1,062. Maximum fees range from $300 (plus 0.5 percent for the funding fee) for VA loans to $500 for FHA loans.