Assuming A Mortgage

how do i assume a mortgage

George Souto Mortgage and Lending Middletown, CT (860) 573-1308 Contact Profile

This past week William Walton asked me if I would post a blog on Assuming A Mortgage .  William has been getting some questions on what is involved in  Assuming A Mortgage and wanted to see what is involved in doing that.

First of all an Assumption of a Mortgage is in the simplest terms:

An agreement between the buyer and seller where a buyer takes over a seller's mortgage and becomes responsible for making the monthly payments.

This can be a big advantage to both the Buyer and the Seller.  The Buyer purchases the house without incurring some of the closing costs involved in the purchase of a home, and the Seller is likely to get a higher selling price for his house.  Also the Buyer assumes the mortgage at the Seller's existing interest rate.  Another advantage to the Buyer is that the Buyer will pay off the house faster because he/she is already a number of years into the existing mortgage. This leaves one to wonder with these advantages why do we not see more Buyers assuming mortgages?  The answer is a simple.

  1. A Buyer can't just take over a Sellers mortgage, they still have to qualify for the existing mortgage, and go through the same application process, minus an appraisal.
  2. Just because a Buyer assumes a mortgage and takes over the payments does not mean that the Seller is no longer liable for the mortgage (I will come back to this point later)
  3. Many Buyers do not have the necessary money to be able to pay the Seller the difference between what they own on the existing mortgage and what the Seller is selling the house for.  For example the Seller is selling the house for $200,000 and still owes $150,000 on the existing mortgage.  This means that the Buyer will need to come up with $50,000 to give to the Seller, because the bank will not allow the additional $50,000 to be added to the existing loan.
  4. It does not make any sense for a Buyer to assume a mortgage that has a higher interest rate than the rate that they can obtain a new mortgage at.  This is one of the main reasons why we do not see Mortgage Assumptions today.  But when interests rates are higher than then the interest rate on the existing mortgage, then it makes sense to do it.  I am a good example of this.  When I purchased my home in 1981, interest rates were 15%.  The Seller that I purchased my house from had a CHFA Mortgage on the house for 7.75% and he had only owned the house for two years.  I assumed the mortgage by giving him the difference between what he was selling the house for and what he owed ($7,000), and my monthly payments were half of what they would have been.
  5. Not all mortgages are assumable.  For example government loans like FHA, CHFA, and VA are usually assumable, but conventional loans usually are not.
  6. This one ties in to #5, even if a loan is assumable, not all Lenders or Investors are willing to allow it.  Just because FHA allows

    their loans to be assumed, does not mean that the Lender will allow the transfer in ownership, even if it appears that the new Buyer is a good risk.  Also the bank does not make as much off of the transaction on a Mortgage Assumption as they would on a new purchase (lower closing costs and lower interest rate)

Before I close this blog I want to go back and explain the second reason that I gave for why we do not see more mortgages being assumed.  You have basically two categories of Mortgages Assumptions:

  1. The first is the Buyer assumes the Sellers mortgage and the Seller is released from all the liabilities, obligations and responsibilities that they have related to the mortgage.  This one is simple and a no brainer  if the market conditions are right.
  2. But the second is not such an easy decisions for the Seller.  This is because even though the bank allows the Buyer to assume that mortgage, they do not release the Seller from the liabilities, obligations and responsibilities related to the mortgage.  That means that if the Buyer defaults on the mortgage, guess who is still liable.  You guessed it, the original holder of the mortgage.  This is a big risk on the part of the Seller and one that most Sellers are not willing to take no matter how much the Buyer is willing to pay them for the house, or how long the house has been sitting on the market.

Even though Mortgage Assumptions are rare these days, I would expect that Mortgage Assumptions will become a much bigger part of the home buying process once interest rates start to rise again.  I hope this has helped explain what is involved in Assuming A Mortgage. and why a Buyer and Seller may or may not agree to do one.  I would advise any Seller  who is entertaining allowing a Buyer to assume his/her mortgage, that they first check their Truth In Lending Statement, Note, or Mortgage to see if it is assumable.  Then contact their Lender to see if they allow a Buyer to assume their mortgage, and  if they will continue to be liable for the mortgage or not.

Again I hope this was helpful, and please feel free to ask questions if something is not clear.

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308, gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage.

By George Souto Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut NMLS #65149

Posted on November 13, 2010 02:32 PM

Comments

27 Comments

George Souto  you wrote this blogpost almost 5 years ago (wow) - so far assuming mortgages has not been an issue, however, interest rates will go up at some point, which is predicted for the end of this year. I very much believe that assuming mortgages will be come more frequent as these interest rates rise.

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