Is a "subject to" or "simple assumption" mortgage a good idea for a buyer with poor credit?

Question

I am talking with a friend about buying her home. My credit is poor, and she suggested that I could assume her loan at 6% as a "simple assumption". My understanding of this is that she would still be responsible for the loan should I default, but that I would keep her interest rate after cashing her out. Could such an arrangement improve my credit rating at all? What would be any negative sides to this situation?

Answer 1

I don't think there are any negatives if she will work with you which sounds like she will.

Make your payments on time and over time, it will have a positive impact on your credit score. After 7 years, any credit smears you have are automatically taken off your report.

Good Luck,

Darryl S.

Answer 2

Acquiring a property "subject to" an existing mortgage is different than assuming a mortgage. I'm not familiar with the "simple assumption" terminology. However, if you assume her mortgage then you move into her position as mortgagee and are liable for the same terms and conditions as she was when she signed the loan papers - same payment schedule, etc.

If it is a "subject-to", then that is a GREAT arrangement for a buyer with bad credit. You can get into the home without having to qualify, and you are not technically liable for the payments being made. It is in your best interest in this arrangement to be responsible for the payments, because if she does not send in payment, then the bank can foreclose and kick you out. I don't think it will improve your credit rating, necessarily, because you are not on the loan and that is what gets reported to the credit reporting agencies. On-time payment just helps your friend's rating.

The negatives are that it doesn't help your rating, and that someone is between you and the bank, who is a major lienholder on a home on which you would hold title. Also, many banks do not allow the title to transfer without them being paid off, which is often written into the note as a "due on sale" clause which says upon transfer of title, the entire balance of the note is due immediately. If that happens and either of you cannot pay, then you can lose your house to foreclosure and that would show on her record - Lose/Lose situation. Also, even though you want to make the payments yourself to make sure you don't lose the house, payments coming from you may tip the bank to the transfer of title, so you have to consider that.

Answer 3

For you, it's a great deal. For your friend, not so much.

Furthermore, the lender can foreclose if the title changes without them being paid off in most cases. When you're rescuing a foreclosure, it probably won't happen. When you're talking about a performing loan, it might, particularly if there's equity in the property according to the lender's thinking.

Getting your own loan with a seller carryback is probably a better way to handle the situation. Yes, your interest rate will be higher and your friend might not get cash. But you won't have the sheriff nailing up a very short term notice to pay off the loan or vacate the property for sale, either.

Answer 4

I would check with the bank that has the loan on the property to see if it is assumable. You might also want to consider state law. As a former banker I rarely heard of my customers being able to assume a loan (but it used to be common). Your understanding is correct but, most of the time lenders want to approve someone for a loan for the following reasons:

1.) They are worried about default
2.) Because of your credit they could charge you higher interest
3.) Offer you different loan terms (extend)

Also, if you are going to "cash her out" that could get really tricky. If you are assuming the loan then you are taking over payments, to pay her off then you are in effect buying the loan from her in which you might have to borrow against the house (second mortgage, home equity line/loan) in order to do so and it may effect her tax situation as well.

Answer 5

A lender would have to approve an assumption. Not all will.
Even if they do, you will be making the payments to the lender. It should be a plus to your credit rating.

Should you default, YES, they will look to the previous owner as responsible for the original loan.

I once assumed a loan from an owner, who had assumed the loan from a GI, who was the originator of the GI loan. I had missed a couple payments and they went directly to the GI. He panicked and contacted me. I straightened it out with no consequences.

Answer 6

I think you should get your own loan, or you will lose a good friend.

I think 80% of such deals go sour.

Answer 7

yes my credit sucked and now my life is so good buying the house was the smarted thing i ever did

do it good luck you will thank me later