If you own your home and have USDA financing on it, you may be able to transfer your ownership to a family member. In order to do this, your family member must assume the loan. Not many loan programs allow loan assumptions, but the USDA is one of them.
Keep reading to learn what a loan assumption means and how you can go about it.
What Does a Loan Assumption Mean?
When someone assumes your loan, they pick up where you left off on the loan. In other words, they ‘take over’ your mortgage. This means that their mortgage balance is the amount of your outstanding balance. The new borrower gets your interest rate and loan terms. The loan matures in however many months/years you have left on it.
Not just anyone can assume your USDA loan, though.
Qualifying for an Assumable Loan
Your family member has to qualify to assume a loan, much like they would have to qualify for their own loan. The lender that holds the loan needs to make sure that they can make the payments. They don’t want to take on a higher risk of default.
In fact, you don’t even start with the lender when you are trying to assume your loan to a family member. You must start with the USDA. They must grant their approval before a lender can move forward. Keep in mind, the USDA will only approve assumptions of current mortgages. If you, the original borrower, is behind on their payments, it won’t be an option.
The USDA will make sure not only that the mortgage is current, but also that the person assuming the loan agrees to assume the loan at that time, regardless of the home’s value. It works in their benefit to find out the home’s value so that they can see the amount of equity they’d have in the home.
Once your family member makes it past the USDA, it’s time to get the lender’s approval. The lender will make sure that your family member has the minimum qualifications to get a USDA loan.
The USDA has flexible guidelines, however, they must first see if you are eligible for the loan program. The USDA only writes loans for low and moderate-income families that don’t make more than 115% of the average income for the area. Keep in mind that the USDA takes into account total household income to prove eligibility, not just the income of the borrower(s). Borrowers can check their eligibility here.
Once your family member proves eligibility, they must qualify for the loan. This means at least a 640 credit score, a 29% housing ratio, and a 41% total debt ratio. Your family member also shouldn’t have any defaulted federal loans on their credit report, and have stable income/employment.
If your family member passes each of these requirements, the assumption may be able to happen.
Taking Care of Business
Once you know your family member can assume the loan, it’s time to make it happen. You must take the proper steps with your lender. They will let you know what you need to do. Each lender has their own process that usually involves some type of paperwork. You may also pay a fee to get it done.
Once your transfer the loan, you then have to transfer ownership of the property. Transferring the loan doesn’t automatically make this happen. You may have to request a Quit Claim Deed from your title company. This publicly recorded document officially transfers ownership of the home from you to your family member.
Should you Get Paid?
The one question you need to ask yourself is if you want to get paid in this transaction. Do you want your family member to pay you the difference between the home value and the mortgage? That’s the equity you have in the home. Think long and hard about how much you want to gift to your family member.
If you do want some of the equity, your family member can either pay you in cash, which is the easiest, or take out a second mortgage to pay you. Of course, you’ll need to work out the details before you start the assumption process because the new 2nd mortgage will change your debt ratio, which can affect your family member’s ability to assume the loan.