Mortgage Assumption

The Good and the Not So Good

When you sell your house, the topic of a mortgage assumption may come up as part of the agreement of purchase and sale.

You should tread carefully when considering an assumption of mortgage and do a bit of home work first.

As in many cases on this website, the area you live in may have different rules and regulations concerning an assumption of mortgage, so we'll mainly just stick to what it's all about and some warnings.

What is a Mortgage Assumption?

The new owner now has taken on the responsibility to fulfill the obligations of the mortgage contract.

They have agreed to continue to keep the payments up-to-date, keep the property insurance active on the property and any other obligations written on the contract.

What Type of Buyer Would Want to Assume the Mortgage?

Here are a few cases where a mortgage assumption would be attractive to a buyer, in order of importance.

* You have a mortgage in place with a 4.5% rate with a 5 year term and there are 3 years left on the term. The 5 year term rate is now 6%.

* The buyer may be a business person with a solid cash flow but short time in business. If the mortgage is a non-qualifying assumption, this could be attractive to them.

* Less closing costs to the buyer. It would cost more to secure a new mortgage than assume an existing one.

When Should You Consider Offering a Mortgage Assumption?

Here are a few reasons to consider allowing a buyer an assumption of mortgage.

* You have a very attractive interest rate.

* The real estate market in your area is depressed and again you have a lower interest rate than what is offered by mortgage lenders at present.

* You have a huge payout penalty if you pay out your mortgage.

-Note: If you have a large payout penalty, this is due to your present mortgage interest rate being higher than what a buyer can expect at a mortgage lender and therefore, the assumption of mortgage will probably not be attractive to a buyer.

Be Careful!

The first thing I recommend that you do, is have a look at your mortgage documents. You could also call your mortgage lender.

Here is what you want to find out or ask, plus what it all means to you.

* Can you offer a mortgage assumption to a buyer?

- If the mortgage is not assumable, you don't have to go any further. You will have to either pay out the mortgage at closing plus any payout penalties, or port the mortgage to your next home, if that option is available.

- If the mortgage is assumable, you can go to the next step.

* Is the assumption of mortgage a non-qualifying, or a qualifying assumption?

- If the mortgage is non-qualifying, the buyer can assume the mortgage without having to be qualified at the mortgage lender to assume the mortgage. Careful with that one!

- If the mortgage assumption is subject to the buyer qualifying, then the buyer has to qualify for the mortgage as if they were applying for a new mortgage. Much Safer

* What are the obligations to you, as the first holder of the mortgage?

- This is very important. Just because the buyer of your house assumes the mortgage, doesn't mean you are off the hook.

Check and triple check this one. Read the document and call your mortgage lender to confirm.

- Your mortgage obligation if the mortgage is assumed, could be one of the following:

1. You are released from all obligations once the mortgage is assumed by the new owner.

2. You are responsible for the mortgage for one year should the new owner default on the mortgage.

3. You are responsible for the mortgage for the remainder of the term (perhaps 2 to 4 years), if the new owner should default on the mortgage.

These are the most common terms that I've seen up to the date this page was written.

The Danger

You sell your house to Joe Buyer and he assumes the mortgage and you are still obligated for one year should Joe default.

You buy another house with a new mortgage.

Joe loses his job after making 2 payments.

Joe stops paying the mortgage after 4 months.

You receive a call 7 months after the closing of the house from your original mortgage lender demanding you start making payments on your old mortgage, make the back payments that Joe missed and of course you still have to make payments on your new mortgage.

Joe is still living in your old house and is depressed and angry.

You seek legal council......etc. etc. etc.

OK, that is a nasty situation. Is it likely to happen? Probably not, but I just want to make you aware that things could go sour. Just take a good look at all the pros and cons before blindly having someone do a mortgage assumption.

On the Brighter Side

My wife and I have actually had a buyer assume an existing mortgage that we had on a previous house.

The buyers were successful business people that because of the time in business, the banks wouldn't give them a new mortgage.

We sold that house (for sale by owner of course) in 2 days, for full price and the new owners never missed a payment. They did some wonderful renovations to the house and property, business was excellent and of course our obligations have long since past.

Everybody won. The buyer, us and even the lender which kept the mortgage with them.

I hope this helps you have a better understanding of the pros and cons of a mortgage assumption when it comes to you, The Seller.

Even if you don't sell for sale by owner and sell through a real estate broker, you should be more aware if your agent is trying to "push" you to have your mortgage assumed by a buyer.

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