What Is the Assumption Balance on a Real Estate Contract?
Certain types of mortgage loans can be assumed by home buyers. This means that a buyer purchases a home and takes over making payments on the seller's mortgage loan. Veterans' Administration and Federal Housing Administration mortgages are assumable, but most conventional mortgage loans cannot be assumed. Mortgage loan assumptions generally require individuals assuming the loan to qualify based on credit standards established by VA, FHA and/or the mortgage lender. Real estate sale contracts providing for an assumption provide the amount of the mortgage obligation the buyer is assuming as of the estimated closing date.
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Unpaid Mortgage Balance
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The unpaid principal balance of a mortgage loan is the amount owed on the loan as of the due date of the last mortgage payment made by the seller. This is the primary component of the assumption balance, and may change between the time a purchase offer is accepted and the time the closing of the sale occurs. Real estate sale contracts may describe how the assumption balance is calculated, due to the potential for changing amounts as sellers make additional mortgage payments, mortgage interest accrues between the offer date and closing, and the seller's lender pays property taxes and insurance.
Accrued Mortgage Interest
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Mortgage interest for fixed-rate mortgage loans is calculated using simple interest from the due date of the last payment made to the closing date. For example, consider an unpaid mortgage balance of $100,000, with a mortgage rate of 5 percent and a last payment made due on Feb. 1, 2011. The closing date is set for May 15, 2011. Interest on the unpaid balance accrues at $13.70 per day, or per diem. Multiply the per diem amount by the number of days from February 1 to May 15, or 103; in this case the accrued interest would be $1411.10.
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Assumption Fees and Additional Costs
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Mortgage lenders may charge a fee for processing an assumption of the seller's mortgage by the buyer. Payment of property taxes and insurance by the seller's mortgage company may be included in the assumption balance if the mortgage loan is in default and the seller cannot reimburse the mortgage company for funds advanced. Assumption balances for defaulted loans may include late fees and foreclosure costs if the sellers are behind on mortgage payments. Buying a home with a mortgage assumption can be a bargain or not, depending on the current appraised value of the home, the unpaid mortgage balance, accrued interest and applicable costs and fees.
Completing a Mortgage Assumption
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Mortgage servicing companies prepare itemized assumption statements detailing all elements and dates used for calculating the assumption balance to a specific date. These statements are requested by the sellers or the seller's agent and are provided to the closing attorney, title officer or escrow agent conducting the closing. Responsibility for paying the unpaid mortgage debt is transferred to the buyers, and buyers may be required to pay accrued interest, costs and fees depending on the terms of the assumption agreement and sale contract.
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