Mortgage assumptions go through periods of popularity and obscurity, depending on what interest rates are looking like at the time. When rates are high, assuming an older mortgage with a lower rate could result in a substantial savings for the buyer. In addition to saving thousands in interest fees, a buyer who assumes a mortgage could also avoid all of the closing fees normally associated with a new home loan. However, there are also some serious potential consequences of mortgage assumption. Understanding how a mortgage assumption works is critical to determine if this tactic is right for you, or if a new mortgage loan in your name would be better.
What is a Mortgage Assumption?
In simple terms, a buyer assumes the existing mortgage of a seller. In most cases the buyer pays cash to the seller for any equity in the property, and then takes over the original mortgage, making the original payment amount at the original rate of interest. For many people, this is an attractive deal that can save thousands. But often people in the banking industry decry this practice because it leaves both the seller and the lender in a precarious position, while the buyer generally reaps nearly all of the benefits with little liability.
What Types of Mortgages are Assumable?
Most traditional mortgages today are not assumable unless they are FHA or VA loans. The latter types can be assumed if the loan was made before a certain period, or if the buyer meets the normal qualifications for an FHA or VA loan. If they do meet these requirements, the buyer can often assume a seller’s mortgage for just a few hundred dollars.
What about Mortgage Liability?
There are two types of mortgage assumption: Simple and Novation. In the case of the former, the deal is made between the seller and the buyer with no knowledge on the part of the lender. This means that the seller almost always retains all liability, even if the buyer stops paying but still has possession of the property. In the case of assumption by novation, the lender must review and approve the buyer, in which case the seller will be relieved from responsibility for repaying the loan.
How does the “Due on Sale” Clause fit into all this?
Because there’s little benefit to the mortgage industry and in fact a certain amount of risk that cannot be mitigated during a mortgage assumption, many lenders have added Due on Sale clauses to their mortgage contracts. This clause stipulates that, should the seller transfer their property to someone else, the lender may make demand for immediate payment of the total amount of the original loan. This is the proper accepted action considering that the lender cannot require the person who has assumed the mortgage loan to pay, as that person has no contractual obligation to the lender and has not passed a credit check or income verification, but has physical and legal possession of the property.
However, it should be noted that certain laws make nearly all types of mortgages assumable under some extenuating circumstances, especially mortgages assumed through death or divorce. In order to learn more and get an immediate quote for a new mortgage, a refinance, or to arrange to buyout or assume the mortgage of another person, call the number at the top of your screen now for a free consultation.