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 and do a bit of homework first.
As in many cases on this website, the area you live in may have different rules and regulations concerning this subject, so we'll mainly just stick to what it's all about and some warnings.
In simple terms, an assumption of mortgage is when a new owner of a property, assumes an existing mortgage held by the previous owner, with the same terms and conditions.
The new owner now has taken on the responsibility to fulfill the obligations of the 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.
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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 has a short time period in business. If the contract 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 loan than doing an assumption.
Here are a few reasons to consider allowing a buyer an assumption.
Note: If you have a large payout penalty, this is due to your present interest rate being higher than what a buyer can expect at a lender and therefore, the assumption will probably not be attractive to a buyer.
The first thing I recommend is that take a look at you loan documents. You could also call your lender.
Here is what you want to find out or ask, plus what it all means to you.
- If it is not assumable, you don't have to go any further. You will have to either pay out the debt at closing plus any payout penalties or port the debt to your next home if that option is available.
- If it is assumable, you can go to the next step.
- If the mortgage is non-qualifying, the buyer can do the assumption without having to be qualified at the lender. Careful with that one!
- If the mortgage assumption is subject to the buyer qualifying, then the buyer has to qualify, as if they were applying for a new mortgage. Much Safer.
- This is very important. Just because the buyer of your house does the assumption, it doesn't mean you are off the hook.
Check and triple check this one. Read the document and call your lender to confirm.
- Your obligation if the mortgage is assumed, could be one of the following:
1. You are released from all obligations once the contract is assumed by the new owner.
2. You are responsible for the contract for one year should the new owner default on payments.
3. You are responsible for the debt for the remainder of the term (perhaps 2 to 4 years) if the new owner should default on payments.
These are the most common terms that I've seen up to the date this page was written.
Let's look at what could happen if a buyer does the mortgage assumption.
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 making payments after 4 months.
You receive a call 7 months after the closing of the house from your original lender demanding you start making payments on your old debt, make the back payments that Joe missed and of course, you still have to make payments on your new loan as well.
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 do an assumption on an existing mortgage that we had on a previous house.
The buyers were successful business people that because of their time in business, the banks wouldn't give them a new homeowner's loan.
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 been lifted a long time ago.
Everybody won. The buyer, us and even the lender.
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.
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 a
mortgage assumption done by a buyer.
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