When a mortgage is assumed by another person then the original borrower's name is removed from the mortgage note and replaced with the person who is assuming the loan. So the original borrower is no longer listed on the mortgage note and the new borrower is now listed and legally responsible for repaying the loan according to the terms of the note.
If you are considering assuming a mortgage or having someone else assume your mortgage we recommend that you work closely with the lender that services the mortgage (the company you make your payments to) as well as potentially a real estate attorney to make sure that the loan assumption process is handled correctly.
When a mortgage is assumed the transaction should be recorded by the county recorder's office for legal purposes. Additionally, if the assumption is done properly the mortgage should no longer be listed as an outstanding loan on the original borrower's credit report and it should appear on the new note holder's report. We recommend that you review your credit reports for the three major credit bureaus one-to-two months after your mortgage has been assumed to make sure that the reports contain accurate and updated information.
If your credit reports show an error or do not have the most current information about the loan, you should contact the bureaus to correct the mistake. It may be helpful to provide the bureaus with the documents used to transfer the loan as well as the revised mortgage note with the name of the new borrower. It is important that your reports show that you are no longer responsible for the mortgage as this can impact your borrowing capacity as well as your credit score.
It is important to highlight that not all mortgages are assumable or transferable to another person. Most conventional mortgages -- loans that are not insured by the government -- are not assumable while FHA, VA and USDA mortgages are assumable as long as the person who assumes the loan meets certain requirements.
For example, the lender typically needs to approve the assumption request and make sure that the person taking over the mortgage can repay the outstanding loan balance. While the process is different than formally applying for a mortgage, the lender usually reviews the credit score, debt-to-income ratio and employment information for the person who wants to assume the loan to verify that they can afford the monthly payment.
Assuming a mortgage offers multiple benefits including reduced closing costs and a faster closing but it is important that you follow the process outlined in the mortgage note to make sure the process goes as smoothly as possible. You should also confirm that the person assuming your mortgage is comfortable with your current loan terms including your interest rate, monthly payment and loan program because these items do not change when the loan is assumed.
Finally, we should point out that some mortgage notes have an acceleration clause -- also known as an alienation clause -- that requires the outstanding loan balance to be paid in full if the mortgage is transferred without the lender's authorization. For example, if someone tries to assume a conventional mortgage, this may trigger an acceleration clause and the lender could demand that the original borrower repay the mortgage immediately.
This is why we always advise you to review your mortgage note carefully to determine if your loan is assumable and to contact your lender to confirm what is possible and how the process works.
"Selling Guide." Fannie Mae Single Family. Fannie Mae, July 2018. Web.
"III.A.3.b.i. Assumability of FHA-Insured Mortgages." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.