Half the Country Has Bad Credit
It’s no secret that half the county’s credit has been trashed during the Great Recession. Due to short sales, foreclosures, bankruptcies, job loss and assorted maladies, a significant chunk of the population can no longer qualify for a mortgage loan. Add, too, the new, much more stringent, underwriting guidelines adopted by lenders in the wake of their irresponsible behavior during the “bubble” years and that creates a huge problem for many, many would-be home buyers and investors.
What to Do?
What to do? One thing buyers can do is search out seller-financed properties, though often such sellers, too, will check out the credit report and be unhappy with the result. Another, lesser-known, option is to assume an existing loan, saving thousands of dollars in closing costs to boot. Now, this, too, has its own problems since most fixed-rate loans of the past 10 or so years have a “non-assumable” clause. This means that if the property title is transferred, the new owner cannot take over the old mortgage. Most loans have a “due-on-sale clause”, meaning the lender can call in the entire amount of the loan in the event of a title transfer. Even the “assumable” loans usually require that the buyer qualify.
Some Ways To Assume a Non-Assumable Loan
Is there a work-around? Thankfully, in some cases, but certainly not all, it may be possible to assume a non-assumable loan. Here are some of the scenarios where that may just work.
- Make Sure There Is A Due-On-Sale Clause. Even if the lender insists that the mortgage is not assumable, here’s a tip: read the mortgage and promissory note to make sure that it has a due-on-sale clause. With all the confusion in the past few years, the lender may not even be able to produce the required documentation. Without it, no due-on-sale clause is legally enforceable. This is a check-with-a-real-estate attorney option.
- Death of a Joint Tenant. When the surviving joint tenant receives title after a death, federal law, the Garn-St. Germain Depository Institutions Act of 1982, prohibits the mortgage lender from enforcing a due-on-sale clause.
- A Related Owner-Occupant Inherits. When a related owner, such as a spouse, either occupies or continues to occupy the property, the lender cannot enforce a due-on-sale clause.
- A Junior Lien Is Placed On The Property. Here, too, the primary lender is enjoined from enforcing the due-on-sale clause. In reality, the primary is in a better position if the homeowner has a second mortgage or an equity line since now two parties are vitally interested in seeing that payments continue to flow in.
- An Owner-Beneficiary Trust Takes Title. These days, trusts and, especially inter vivos trusts, are used to avoid probate costs. Although the lender cannot enforce a due-on-sale clause under this scenario, the mortgage-holder does have a right to a copy of the trust.
- Transfer After Divorce. After a divorce the lender cannot enforce a due-on-sale clause if either children or a former spouse occupy or continue to occupy the property. They must occupy though.
- Ask About an Assumption Fee. Even if the situation is not one of the above, it always pays to ask the lender if an assumption is possible despite the presence of a due-on-sale clause. Especially if the loan is in default, the lender may be exceedingly happy to have the loan brought up to date often with no fee whatsoever. Lenders today have plenty of foreclosures and short sales already and so may be quite willing to make a mutually-beneficial deal.