Assuming A Mortgage? Proceed With Caution

26 December 2018

You may have heard that assuming a mortgage is a viable option for buyers with poor credit or those who are otherwise unable to qualify for a loan. With an assumable mortgage, you agree to take over and pay down the balance of the previous owner's home loan, according to the original terms.

Whereas assuming a mortgage may be the only option for some perspective buyers, it warrants careful consideration before making a commitment.

Loan assumption packages are available online in PDF format and come complete with frequently asked questions and answers. Reviewing this information will help you decide if a loan assumption is something you might be interested in.

Keep in mind that assumption packages are lender specific and the package you review online may differ from the one your lender uses.

In the 1970s and 1980s, many mortgages were assumable. But then, interest rates rose and due to borrowers assuming mortgages with lower fixed rates, banks missed opportunities for greater profits. As a result, since that time, most loans have been written with due-on-sale clauses demanding full repayment of loans at closing.

Federal Housing Administration and Veterans Administration loans are still assumable so long as the borrower qualifies. However, the most enticing reason for assuming a mortgage is a lower fixed interest rate.

With today's low rates, finding an assumable loan with lower rates is unlikely but if rates continue to rise, this situation could change.

Arguments in favor of loan assumptions

Even though financial institutions shy away from loan assumptions, some private lenders are willing to write assumable loans without requiring qualification. There are fees involved, some of which are listed below.

In cases of divorce where one of two owners has been awarded the home by decree, a mortgage assumption may be a viable solution, but again, in today's market, refinancing or selling may be a better choice.

It could be that a seller needs to get out from under the burden of owning a home and is in a hurry to do so. In this case, a loan assumption might be advantageous to a buyer or an investor. It would depend on the amount of equity in the home and how much the owner is expecting to receive over and above the loan assumption.

It could be that a seller needs to get out from under the burden of owning a home and is in a hurry to do so. In this case, a loan assumption might be advantageous to a buyer or an investor. It would depend on the amount of equity in the home and how much the owner is expecting to receive over and above the loan assumption.

Before taking the plunge

Consider the term of the loan. A new loan usually runs for 30 years. But with an assumed loan, the clock started ticking when the original buyer got the loan. If the buyer is 10 years into a 30-year loan when you assume it, then you'll have 20 years left to pay on the loan.

Get a copy of the loan papers from the seller in order to review the exact conditions of the loan. In addition, get an assumption package from the lender, this will explain what you need to do to assume the loan. Be sure that you understand the precise terms of the mortgage before assuming it.

Expenses such as closing costs, realtor fees, and appraisal fees may be avoided when you assume an existing mortgage, but do your homework. There will most likely be assumption fees. Depending on where the property is located, assumption fees can range from $500 to over $1000 or more.

Assuming the mortgage does not necessarily mean that you will be able to have identical terms as the previous owner. Lenders often have the ability to alter loan terms if the loan is assumed, which could negate any benefit from assumption. Make sure you discuss all fees and monies due before signing. And don't forget to sign a release from liability for the seller.

While sometimes a viable option, loan assumption can be tricky. As with all financial endeavors, it is best to consult a professional.