Assuming a Mortgage Laws

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What Is an Assumable Mortgage?

An assumable mortgage is one that allows a different party to take over the already-existing loan obligations a previous homeowner. This type of transaction is called an “assumption of mortgage”, or “assuming a mortgage”. It is often allowed because the party assuming the mortgage can take usually take on the same monthly payment rates and interest rates on the existing loan terms. 

These are usually lower than the current rates for loans, since a previously issued loan may be associated with older rates (i.e., they haven’t been affected by inflation). In turn, the bank or lending institution can continue to collect on monthly payments instead of losing the payments due to the original borrower’s default. 

Assumption of mortgage is related to an assignment of mortgage, except that an assignment of mortgage may only involve specific rights associated with the mortgage (like the right to foreclosure). On the other hand, assuming a mortgage typically entails an overall transfer of the entire mortgage agreement to the new party.

Does an Assumption of Mortgage Require the Lender’s Permission?

Generally speaking, the lender needs to be notified if there is going to be an assumption of the mortgage. The parties involved should provide written notice and may also wish to record the assumption with the recorder’s office.

Also, the party assuming the mortgage may still need to qualify for the loan they are assuming, and may have to pay other costs such as closing fees and appraisal fees. 

What Are Qualifying and Non-Qualifying Assumptions?

Some jurisdictions make a distinction between qualifying and non-qualifying assumptions. Basically, qualifying assumptions require the new party to obtain loan approval before they can take over the existing loan terms. They must usually meet certain income and credit ratings to qualify.

Non-qualifying assumptions may allow the new borrower to assume the loan simply by making payments involving the difference in the property’s equity. This may allow the borrower to assume the loan even if their credit would not qualify for other types of loans.

Legal Disputes Associated with Assuming a Mortgage

The qualification process for mortgage assumptions can sometimes be a source of legal dispute. Fraud in an application may occur, especially where a purchaser is desperate to take on the loan even if they don’t qualify. It may happen that the new third party borrower might engage in questionable practices just to reach an agreement on the loan. For example, they may misrepresent their credit history in order to qualify for a loan, which can constitute fraud charges in some areas. 

Or, the current borrower may make a misrepresentation to the newer party in order to get the loan off their hands. This can create problems in the future, especially if there is little intervention or overseeing of the process by the bank.

These types of legal disputes are usually addressed in a civil court of law. The legal dispute will generally be resolved by examining all the relevant documents, including the original loan agreement and the documents associated with the mortgage assumption.  This is why it’s important to have a written contract and record of the mortgage assumption, in the event that it’s needed later on as proof of the transfer.

Do I Need to Hire a Real Estate Lawyer?

The process of assuming a mortgage has many benefits for all parties involved. However, mortgage assumptions can be complex and may involve a lot of paperwork; thus, it’s important that you contact a real estate lawyer if you need help with a mortgage assumption. Your attorney can review all the documents and conduct a title search for you, to ensure that there aren’t any issues with fraud or misrepresentation. Also, in the event that a lawsuit needs to be filed, your attorney can provide you with valuable representation throughout the process.

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Last Modified: 06-17-2014 04:06 PM PDT

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