A mortgage assumption happens when a new buyer takes over payments from a current owner. While mortgage assumptions are less common than they were in they past, they are still available on some properties. When assuming a mortgage there are certain criteria that the seller and the buyer must meet in order for it to be successful.
There are two types of mortgage assumptions: qualifying and non-qualifying. Each of these shares the same principal in taking over the current mortgage on a property, however, the options are vastly different when it comes to the criteria.
With a qualifying assumption the new borrower has to obtain approval to assume the loan from the current lender. This means having to qualify as he would on a traditional mortgage, providing income and credit requirements. If the borrower's credit and income do not meet the minimum stipulations of the lender, he is not allowed to assume the loan.
A non-qualifying assumption is more commonly referred to as seller financing. In this scenario a borrower can assume the mortgage payment by paying the difference of the equity in the property to the seller and the seller will finance the remaining amount. For example, on a property that is worth $200,000 where the seller has built up $20,000 in equity, the new borrower would have to pay $20,000 up front as a down payment to assume the loan, or work out a financing term with the seller to account for the down payment if she isn't able to come up with the full amount.
Whether it's a qualifying or non-qualifying assumption, the lender must be notified. In some cases the lender can site the "due on sale clause". The due on sale clause means that they require the balance of the mortgage to be paid immediately, which can discourage some home owners from initiating an assumption, and is one of the reason that they have become rare in recent years.
The closing process for assumable mortgages are the same as with traditional mortgages. The closing documents and paperwork must been overseen by an escrow officer at a title company who acts as a disinterested third party to the transaction. Both the seller and buyer must sign off on closing, deed and title documents in order for the property to successfully transfer ownership rights.
In a non-qualifying assumption that is seller-financed, buyers can expect not only higher down payment scenarios but also higher rates of interest. Since the seller is acting as the bank and assuming all of the risk should the borrower fail to pay, interest rates will typically be above 7 percent.
For borrowers with extremely poor credit that includes many delinquencies, late payments or charge offs, non-qualifying loan assumptions can be an ideal path to home ownership. The goal of the buyer should be to rehabilitate his credit over time and eventually purchase the property from the seller using a traditional loan later on. However, it's important that the buyer have a substantial amount of savings prior to working up a loan assumption of any kind.
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