What is an Assumable Mortgage?
Mortgage assumption is the transfer of a existing loan, complete with balance and terms, to the purchaser of the property in which the lien is still in place. For example a homeowner owes a thirty year mortgage loan of $350,000 dollars against his property. A buyer wishes to purchase the house for $400,000 but continue with the same mortgage to avoid the process or expense of a new loan. So rather then starting a new loan he purchases the equity for roughly $50,000 in cash and will assume responsibility for the $350,000 mortgage.
Almost all mortgages are potentially assumable, as a default, though many times the new borrower will need to demonstrate the same or better credit worthiness.
A lender may try to prevent the assumption of a mortgage loan with what is known as a “due upon sale” clause written into the contract of the loan. this causes the original holder to repay the loan in full before ownership can be transferred. However mortgages insured by the Federal Housing Administration, the Department of Veteran Affairs, or the United States Department of Agriculture are always able to be transferred and assumed.
What is Needed for a Mortgage to Transfer?
Consent of the lender is first and foremost the primary factor in transferring or assuming a mortgage. Transfer of property with an existing mortgage loan without a lender’s consent does rarely happen and is usually refereed to as a “sale subject to” the existing loan. It should be noted, that this alternate assumption method in no way impacts the lender’s right to call the loan due if a “due on sale” provisional clause was established in the contract.
The next stage of the assumption process is the release of liability. The seller of the principal and property must remember to request a release and transfer of responsibility from the lender. In fact, if the mortgage is assumed without consent from the lender, the original owner of the loan and property is still under contractual obligation to fulfill the mortgage payments if the newest owner ever defaults.
Advantages and Disadvantages of Assuming Mortgage:
There are a few advantages and disadvantages to an Assuming Mortgage. For instance, it is possible that the seller’s mortgage rate is locked at a much lower interest rate then is currently available on the market, thus benefitting any potential buyers. There are also fewer closing costs involved when assuming a mortgage, enabling the buyer to procure less cash then would normally be needed in closing a house, which expedites the sales process. A common disadvantage is if a home is selling for $350,000 with a remaining mortgage of $100,000 the buyer will need to have or to come up with $250,000 to make up the difference. This can be daunting, and if it resolves in a second mortgage can complicate matters much further. A second mortgage, in instances where they own a different portion then the primary lenders can cause undue stress as the two companies refuse to cooperate, leaving the buyer in a bind.