Assumable Mortgages – Assuming an Existing Mortgage

When you’re able to assume an existing mortgage, it speeds up the home buying process and often saves you money because you can avoid appraisal costs and legal fees. You may even be able to avoid qualifying with the lender who holds the mortgage. Of course you should expect to pay the difference between what the buyer still owes in principle and the selling price as the down payment.

Reasons Assumable Mortgages Are Attractive to Buyers

When interest rates rise, assumable mortgages are very attractive to buyers as it allows the buyer to benefit from the lower interest rate available at the time the mortgage term was drafted.

Occasionally, properties may become available where the seller is attempting to keep a good credit rating while selling the property at short-sale. In this situation, an assumable mortgage can be a fantastic deal for the buyer, even if it causes a loss to the seller.

Qualifying for an Assumable Mortgage

Most lenders expect the borrower to qualify before he or she can assume the loan. The qualification process includes all of the same requirements for new loan applicants.

Challenges to Assuming a Mortgage

One of the major challenges of assuming an existing mortgage is coming up with a down payment that is equal to the equity the seller has built up in the home. Unless the seller is in a high-ratio mortgage, this may be more than 20% of the selling price of the home. A great deal depends on what has been happening in that local housing market.

Occasionally, the property owner has the ability to carry financing on the balance the buyer cannot pay for outright. In this case, the buyer assumes the mortgage with the lender. Then the seller gives the seller the equivalent of a second mortgage as a vendor take back (VTB) mortgage.

In situations where the seller doesn’t have the ability to finance the difference between the down payment and the assumed mortgage, the borrower must find another source of financing. The cost of taking out a second mortgage, if one can be secured, may make the assumption impossible.

Buyers also face an additional challenge. Even if the lender is willing to allow the buyer to assume the loan, the lender may not be willing to continue the mortgage on the same conditions that exist in the assumed mortgage if the buyer’s credit risk is lower than the sellers. Current market conditions can also make a lender less willing to allow assumption of the mortgage.

Sellers must also be wary. If the paperwork isn’t drawn up carefully, the seller may remain liable for the mortgage if the buyer defaults, even after the assumption has been recorded. This failure to ensure the seller is released from liability in writing can ruin a good credit rating rapidly.