What Does it Mean to Assume a Mortgage?

The purchaser of property may assume an existing mortgage loan on the property.

To assume a mortgage means to accept the full legal obligation to repay an existing mortgage loan. Sometimes this means accepting the exclusive obligation to repay the loan, while other times this means accepting the obligation in addition to the original borrower's obligation to repay the mortgage.

Function

Mortgage assumption generally goes hand in hand with a sales transaction on a piece of real property. For one reason or another, the new owner of the property would prefer to assume the existing mortgage rather than take out a new mortgage on that property. Therefore, the existing mortgage on the property remains attached even though the property title changes hands.

Property

A mortgage loan always includes a mortgage lien that attaches to a specific piece of real property, called the collateral. When a mortgage assumption occurs, the mortgage remains attached to the same collateral, which is why the assuming borrower must have some interest in that real property. Therefore, the assuming borrower typically takes title to the collateral.

Benefits

Mortgage interest rates vary over time. A significant change in mortgage interest rates results in a significant change in monthly mortgage payments. Therefore, if mortgage rates are higher now than they were at a time the existing mortgage loan was taken out on the collateral, the new property owner can purchase the collateral and assume the mortgage loan to keep costs down. This makes a sales transaction more beneficial to the buyer, which of course helps the seller market the property.

Requirements

Some mortgage lenders will not allow assumption of their mortgage loans. However, most lenders will allow assumption if the borrower meets the lender's credit and underwriting requirements. Mortgage lenders generally impose the same underwriting and credit requirements on the assuming borrower as they would on a borrower submitting a fresh application for a new mortgage loan.

Procedure

The existing mortgage loan documents will outline a procedure that the mortgage lender requires to carry out an assumption of the loan. This procedure generally requires that new borrower, or the assuming borrower, to submit a complete application, including financial statements, credit reports and employment verification. The lender will then review the application and either approve or disapprove the assumption.

Warning

A true assumption should result in the release of the original borrower from the mortgage loan. This means the original borrower has no future responsibility to repay the mortgage loan. However, people often confuse an assumption with a cosign agreements. When a new borrower signs on as a cosigner, the original borrower remains responsible on the loan as well. It is important to verify that the bank will allow an actual assumption, which means a full replacement of the original borrower with the new borrower.

References

• "Real Estate Finance Law"; Grant S. Nelson and Dale A. Whitman; 2008