What is a Workout Assumption?

A workout assumption occurs when a borrower can no longer make payments on an existing mortgage. Instead of forcing the borrower into a foreclosure proceeding, which can be costly, the lender seeks a qualified third-party to step in and assume the loan. This allows the all parties to benefit by keeping the loan on the books and permitting the borrower to stay in the home.

Reviewing Options

A borrower who is facing a financial situation will consult with the lender to determine what options may be available to maintain the mortgage. A lender can look to refinance or see if the borrower qualifies for other programs that can assist with their ability to keep servicing the mortgage loan. If the situation of the buyer becomes too dire, a workout assumption can be used.

Finding a Qualified Third-Party

The borrower finds an individual who is not a party to the loan agreement to step in as a substitute borrower. This substitute borrower should be qualified by the lender’s standards in order to assume the provisions of the loan. The substitute borrower should also be willing to assume the loan obligation since, upon approval, it will be transferred from the old mortgage holder to the new borrower.

Drawing up a New Agreement

With the qualified third-party in place, the bank sits down with the old mortgage holder and new borrower in order to draw up a new or substitute loan agreement for the property. This agreement typically changes the name of the borrower as a substitute but not much else regarding the terms of the loan. The change of borrower is necessary since it is the individual that the workout assumption is based on.

Obtaining Approval

The lender completes the loan paperwork with the new party and submits the loan application to the bank for approval. The workout assumption does not go into effect until the lender approves the loan and the terms of the new mortgage, which is the acceptance of the qualified third-party borrower. Once this approval has been completed, the loan resumes with payments coming from the new borrower and the old borrower working out some arrangement to get back on track financially.

Workout assumptions are a common tool used by banks and lenders to help people keep their homes. The bank has the same interest in keeping someone in the home and paying the mortgage, as the borrower has to save their home. When faced with a situation such as foreclosure, which can be brought on by job loss, death or catastrophic illness, the borrower should immediately contact the lender and begin the process that will help maintain home ownership.