Expert: Diann Tonnesen - 3/10/2009

Question
I have a question...my husband and I are really wanting to get out of our house right now and possibly into a bigger one.  Right now, we have only been in the house 2 years in may, 2009.  so we don't have any equity built up and in order to sell our house, it will cost us between 6,000-10,000 which we don't have.  what I'm wondering is what is the procedure for doing an "assumable loan" on our house so that someone can simply take over our house loan, payments and everything.  and is that even possible?  our neighbor across the street said a few months ago that he would buy our house, so assuming he is still interested, finding a buyer would not be necessary, but what is the process and is it even possible?  thanks.

Answer
There are really no such things as "assumable" loans anymore. FHA and VA loans used to be assumable with no qualifying, but VA stopped that in March of 1988 and FHA stopped in December of 1989.

All FHA and almost all conventional loans have an "acceleration" clause which says that if the home is sold, the note becomes immediately due and payable. So if you sold your home to your neighbor, technically the bank could say that the mortgage needed to be paid off within 30 days. Of course, in the current economic climate if you chose to go this route and the mortgage was always paid on time the banks may very well not even worry about that. Financing done this way is called an all inclusive trust deed or a wrap.

But in addition to the possible risk of the note being called due, even if you are willing to sell your home to your neighbor this way, YOU are still ultimately responsible for the mortgage. If for some reason your neighbor lost his job or just lost interest in the house and he walked away, you could very well find yourself paying for two mortgage payments.

Can your neighbor not qualify for his own loan? It should not cost you any more to sell your home directly to your neighbor with him getting a new mortgage than it would for you to sell it to him on a wrap of your existing note. He may have some loan costs, but if the interest rate is raised just a bit the lender can incorporate those costs into the loan amount. Believe me, if a lender does not want to loan money to your neighbor, you certainly do not want to either.