Assumable Mortgages

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 What is an Assumable Mortgage?

An assumable mortgage is a type of mortgage loan that can be transferred by a seller and “assumed” by the purchaser of the parcel of property to which the mortgage is attached. When such a situation occurs, the purchaser will become responsible for paying off the remaining balance of the mortgage loan. The act of assuming the terms of the mortgage is known as, “mortgage assumption.” 

Mortgage assumption can take place in one of two ways:

  • By a simple assumption: In a simple assumption transaction, the purchaser will take over the mortgage contract and continue to make payments on the loan. However, the seller will still be on the hook if for some reason the purchaser defaults. The only difference is that the seller will now be in a secondary position to pay off the loan. 
    • In other words, even though the purchaser is paying, the seller can be held liable for the mortgage if the purchaser fails to complete the payments.
  • By Novation: In contrast, a novation is when a purchaser agrees to take responsibility for both the payments and the terms of the mortgage loan. In this scenario, a lender will assign the seller’s rights and duties to the new purchaser. A new mortgage contract will then be created that releases the seller from all mortgage loan obligations. 

It is important to note that not all mortgages are assumable. Additionally, regardless of which type is chosen, a lender will still need to formally approve the mortgage loan assumption. Whether a lender approves the transaction will largely depend on the purchaser’s ability to pay off the remaining debt as well as their potential to qualify for a loan.

What is an Example of an Assumable Mortgage?

The following is an example of how a mortgage loan assumption works:

  • Imagine Person A obtains a mortgage loan for $100,000 to purchase a house. After several years, Person A decides to sell the house, but has not yet finished paying off the mortgage. The house is put up for sale with an asking price of $200,000, not including the mortgage loan. When Person B asks if they can buy Person A’s house, Person A agrees and discloses the amount of the mortgage loan. Person B now has three choices:
    • Person B can either pay the asking price and trust that Person A will continue paying off their debt (note that this means Person B will risk having the house foreclosed on by the bank if Person A does not pay off the mortgage); 
    • Person B can pay the asking price of $200,000 and also agree to assume the price of the mortgage (i.e., a simple assumption); or
    • Person B can agree to pay the purchase price and assume both the amount and terms of Person A’s mortgage loan (i.e., a novation).

The above scenario is a brief explanation of how to assume a mortgage. Of course, this will also be contingent on the circumstances, the laws of the state, the terms that the buyer and seller agree to, and whether the lender approves the arrangement. 

In sum, to assume a mortgage involves:

  • Determining whether or not the mortgage loan is assumable;
  • Sending a request to assume the mortgage to the lender; 
  • Submitting personal financial documents to the lender for review; and
  • Entering into a mortgage assumption agreement by signing that document or by modifying the deed to the house.

Are All Loans Assumable?

As previously mentioned, there are several different kinds of mortgage loans, but not all of them are assumable. A good rule of thumb to go by when trying to determine whether a loan is assumable or not is that federal mortgage loans are generally assumable. Some examples of federal mortgage loans include: 

  • FHA mortgage loans; 
  • VA mortgage loans; and 
  • USDA mortgage loans. 

In contrast, mortgage loans that are not offered by the federal government (e.g., mortgage loans issued by a private lending institution), are typically not assumable. 

What are the Benefits of an Assumable Mortgage?

An assumable mortgage can be very beneficial for both a seller and a homebuyer. Some pros of assumable mortgages may include:

  • The buyer may pay less during the closing since they will not need to obtain an underwriter to include a new mortgage loan.
  • The buyer will also be able to lock-in a mortgage rate that is most likely lower than the current mortgage rates, depending on when the seller received the loan.
  • The remaining balance of the mortgage will probably be lower than if the buyer took out a new loan. Again, this will be contingent on how much the seller contributed towards mortgage payments.
  • A buyer who assumes both the balance and terms of the mortgage (i.e., a novation), will relieve the seller from accruing mortgage debt.
  • Finally, a seller might be able to sell their home faster due to factors, such as low interest rates on the mortgage and a reduced closing price. 

What are the Disadvantages of an Assumable Mortgage?

On the other hand, there are some disadvantages to having an assumable mortgage. Some cons of assumable mortgages may include:

  • If the buyer is in better financial shape than the seller, then the amount the buyer will have to put down as a down payment could potentially be much higher than if they were taking out a new loan themselves. 
  • A homebuyer may need to pay a mortgage loan assumption fee in addition to their closing expenses, depending on the lender and the type of mortgage assumption (e.g., a simple assumption vs. a novation).  
  • Before the lender agrees to the transaction, the buyer must prove that they can meet the lender’s credit and income requirements to assume the loan.
  • If the loan is old enough, then the buyer might not save as much money as they would if it was a newer mortgage loan since houses tend to appreciate over time.
  • Lastly, the seller may still be on the hook for the mortgage loan if the arrangement involved a simple assumption and the buyer defaulted on the loan.

Can a Family Member Assume a Mortgage?

As discussed above, not all mortgages can be assumed. For instance, conventional mortgages generally cannot be assumed by a buyer. The reason being is because they typically contain a “due on sale” clause. A due on sale clause permits a lender to demand the remaining balance on the mortgage if the loan is transferred or sold without the lender’s permission. 

However, a lender cannot legally trigger a due on sale clause payment in certain situations, such as when an heir is taking over a mortgage from parents after they are deceased or in the event of a divorce. These types of exceptions will normally only apply when a transfer of ownership occurs between relatives, not third parties like a homebuyer. 

What Are Some Legal Issues Associated with Assumable Mortgages?

While assumable mortgages can offer many benefits to both the seller and a homebuyer, there are two significant legal issues that often arise with assumable mortgages. These issues include:

  • Needing to obtain consent from a mortgage lender; and/or
  • Remaining liable for the mortgage payments if the seller and buyer did not enter into a release of liability agreement (i.e., a novation). 

In either of the above scenarios, the buyer and seller can both face serious legal consequences. This is especially true if the lender decides to file a lawsuit against the parties. In such cases, a court may award damages or may order the parties to re-write the terms of the mortgage assumption agreement. 

Do I Need a Lawyer for Help with an Assumable Mortgage?

In general, assumable mortgage issues can be extremely difficult to navigate without proper legal assistance. Aside from real estate finance laws, a party must also comply with various contract laws and state procedural requirements. Thus, it may be in your best interest to contact a local mortgage lawyer for further guidance with assumable mortgage issues. 

An experienced real estate lawyer can go over your options for purchasing and/or selling your property and can ensure that you understand the consequences of each of those options, so that you can make an educated decision. Additionally, your lawyer can draft and review your assumption agreement, as well as can negotiate on your behalf for a more favorable arrangement. 

Finally, if there is a dispute over the terms of a mortgage assumption agreement and you need to appear in court, your lawyer can also provide representation. 

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