About Assuming a Mortgage

Once a very popular activity, assuming a mortgage is now a rare occurrence. This is because of what's called a "due on sale" clause in most mortgage loan documentation. "Due on sale" means that the note is due and payable if ownership of the real estate changes. However, when a mortgage assumption is available, understanding how it works and might benefit you could be important.

Function

When permitted, you may have the right to assume (take over) the first mortgage loan that is secured by the real estate you are buying. This could be important as the loan already in place may be better than the interest rates and terms you could expect with a new mortgage. The closing can be streamlined without the necessity of painfully reviewing all the voluminous documents required with the implementation of a new mortgage loan.

Benefits

Both borrower and lender enjoy benefits with a mortgage loan assumption. The lender gets to keep their loan instead of being paid off via a new mortgage given by another lender. The borrower often saves both money and time. Many of the closing costs associated with getting and recording a new mortgage loan are eliminated. Required recordings include a new deed, showing the borrowers as new owners, the transfer of the mortgage loan from the former owners to the borrowers, and a few other documents pertaining to the locale of the real estate. If interest rates are higher at the time of purchase, the borrowers also benefit long-term from lower rates.

Features

When assuming a mortgage loan, all rates, terms, and conditions remain in effect. The only material change is that the new borrowers/owners' names are inserted. They now become responsible for the remaining years and scheduled payments on the loan. For example, a thirty-year loan that was made five years ago will now have twenty-five years to run before reaching a zero balance.

Considerations

The mortgage lender will not simply allow a mortgage loan assumption because the borrower wants to do so. The lender will try to ensure that the prospective new owners/borrowers are credit worthy and meet their loan approval guidelines. Also, borrowers will typically need more down-payment cash. The sellers have paid one or more years of principal and interest on the loan. In stable or increasing value periods, real estate holds its value or is worth more than when the mortgage loan was made. Therefore, new owners will normally have to include principal already paid in their down-payment calculations.

Significance

When borrowers assume a mortgage, they often get better rates, a shorter loan term and fewer closing costs than with a new loan. When a mortgage is "assumable", borrowers should examine the terms surrounding this ability. These conditions will be clearly stated in the original loan documents. It will quickly become clear if the borrower should consider assuming the mortgage or to apply for a new one.

Resources

• Are Mortgage Assumptions Beneficial to You?