Mortgage assumption is an unconventional way of owning a home that allows you to obtain mortgage without personally going through a sale. As the name suggests, it is via “assuming” somebody else’s mortgage that you get to own the property – with its attached financing.
In a nutshell, assuming a mortgage is basically just taking over somebody’s home loan. The seller gives you the mortgage title and you continue making the monthly payments.
So how does a mortgage assumption go?
A mortgage assumption proceeds depending on the type of assumption in action. In a simple assumption, the lender is not usually involved; no credit check nor lender approval is required. However, under a creditworthiness assumption process, the buyer must first pass the standard qualifications set by the dispensing lender.
Typically, most of these transactions go with the buyer paying the seller a cash deposit before the seller transfers his or her mortgage title.
And how does an assumable mortgage benefit a buyer?
An assumable mortgage is very favorable if the mortgage carries an interest rate lower than today’s rates. With lower rates comes lower monthly mortgage payments. A single point difference in interest rates could end up saving you thousands of dollars on interest payments throughout the life of the loan, compared to taking out the same mortgage product at today’s rising rate climate. But of course, you also need to look at the type of the loan. Most assumable mortgages are government-insured home loansso when doing your comparison, you need to compare the rates between the same loan types.
Another advantage is that you don’t need to pay for the costs of closing, and the various origination and lender fees that come with an original purchase. Closing costs may tally to around 3 to 6 percent of the total mortgage balance. You can take this money and use it to pay for a cash deposit instead.
Still, you need to consider the original owner’s equity. If he or she has significant equity on the property, you might have to put down money as well to make up for the difference.
Word of caution
Conventional lenders hate assumable loans, that is why it is rare for you to find assumable conventional home loans. Why? It is because with an assumable mortgage, lenders find it hard to properly evaluate the buyer’s creditworthiness. They also lose money on the costs of closingthe loan as well the possible interest charges that could be had from originations.
How do I know if my mortgage is assumable?
It is stated in the contract. Read the fine print. If a mortgage is not assumable, you can find a due-on-sale clause that states a borrower should pay the full amount of the home loan should he or she grant the property’s ownership to somebody else. Therefore, it follows that an assumption is not possible.
This should be observed with care; proceed with the assumption only when you are absolute that the mortgage is indeed cleared for taking over. Speak with your lender if you are having doubts about the loan’s assumability. Remember that if you transfer the loan carelessly to another person and it is later found out that the liability is still on your name, your credit may be at risk when the new holder of the loan defaults on the mortgage. A mortgage default has a significant impact on your score and can firmly bar your chances of obtaining mortgage or any other loan in the future.
Know the possibilities and learn the risk. Whether you are a buyer or a seller of a property with an assumable mortgage, it pays to know what you are up against and not just the silver-platter benefits laid out in the upfront.