Assumption Of Home Loan By Buyer Releases The Seller From Any Liability For The FHA Or VA Loan

Question: In a recent column you said that, after the assumption of a home mortgage loan, the buyer is primarily liable for the home mortgage loan, but the seller remains secondarily liable. In light of the “spread” between older home mortgage loans of 2-3% and current home mortgage loans of 6-7%, our mortgage business is focusing on assumption financing of FHA, VA, and other government loans. My understanding is that, under federal law, after an assumption of a government loan, the seller is released from liability. Am I correct?

Answer: You are correct about FHA, VA, and other government loans. In general, however, if there is an assumption of a conventional loan by a buyer, a lender will not release the original borrower. For example, if a lender makes a $5 million mortgage loan to Warren Buffet to buy a Paradise Valley home, even if Elon Musk bought the Paradise Valley home and agreed to assume the $5 million loan, why would a lender release Warren Buffet, and look solely to Elon Musk for payment of the $5 million loan (especially with declining Tesla sales)?

Note: Our law firm rarely, if ever, gets involved in any VA or FHA loans, or other government loans, so we were not aware that a seller is released from a governmental loan if a buyer assumed the government loan. Government loans have some political ramifications, namely, encouraging home purchasing without any liability of the seller for the existing government loan. Thanks to Mike Roberts of UME Projects for his knowledge of assumptions of government loans.