What Is the Assumption of a Mortgage?
The assumption of a mortgage is the act of transferring an existing mortgage on real property to a new buyer. This transfer allows the new buyer to qualify for the existing mortgage without applying for a new mortgage.
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Assumption
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If a mortgage does not have a clause that requires notice to the lender, called a due-on-sale clause, a buyer can assume a mortgage without asking lender permission. This type of assumption, called non-qualifying mortgage, sets up a situation in which the new buyer is responsible for repayment of the mortgage, but the original buyer becomes a guarantor.
Approval
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If there is no due-on-sale clause, the lender has to approve of a mortgage assumption. This type of assumption, called qualifying, requires the buyer to apply for the assumption of the loan. In this case, the original buyer becomes completely free of the mortgage once the assumption is approved.
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Process
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In a non-qualifying assumption, the buyer will probably pay a fee in order for the paperwork to be completed. Typically, the terms and rate remain the same. In a qualifying assumption, the new buyer must apply for a mortgage loan, pay closing costs and also be subject to changes in rates or terms.
Risks
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One of the biggest risks for the original buyer in a non-qualifying assumption is that he becomes a guarantor of the loan. If the new buyer were to default on the loan, the lender could foreclose. If the lender then sold the property for less than the mortgage amount, a deficiency balance would result. The old buyer then becomes responsible for that deficiency balance.
Benefits
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For a new buyer, a non-qualifying assumption is a great benefit if interest rates and mortgage costs have gone up; he will not be subject to new costs or new interest rates. On the other hand, a qualifying assumption relieves the original buyer of any responsibility for the mortgage.
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References
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