What is a mortgage assumption?
A mortgage assumption is a transaction that takes place when a new home buyer formally takes over the loan obligation of a seller while that seller’s mortgage financing stays in place. Through mortgage assumption, another person “assumes” your loan at its current interest rate and takes over the payments. In some cases the seller will be released from the loan, though in most cases the lender will refuse to release the original borrower (the seller) from the original loan obligation even in cases where the buyer is well-qualified for the mortgage assumption.
Which loans are assumable?
Very few loans are assumable these days, however it cannot hurt to review your mortgage to see if it is assumable. There are two basic types of mortgage assumption transactions: a simple assumption and a novation agreement. In a simple assumption the mortgage lender is not involved and the buyer and seller come to a private agreement. In a novation agreement the seller will notify the lender of their intent to allow a different buyer to assume the mortgage. If the mortgage lender agrees to the assumption, typically a buyer must meet the lender’s credit and income requirements, the seller will then be released from the liability of the original loan.
Who can do a mortgage assumption?
As we mentioned above some mortgages are assumable and some are not. You can look through your original mortgage documents or ask your mortgage company to learn more about your loan. Mortgages that were originated before Dec. 1, 1986, use the simple assumption process. Most loans after that date include the “due-on-sale” clause which we will talk about below.
Mortgage assumption and the “due-on-sale” clause
The biggest factor limiting the use of mortgage assumptions is the “due-on-sale” clause that is included in most conventional home loans since 1986. This clause requires that ‘the loan be repaid in full if a property is sold.’ Even with the “due-on-sale clause,” mortgage lenders may allow an assumption (because foreclosure and non-performing assets are costly for banks), but the interest rate will typically be raised to current market rates.
Where you are the buyer or the seller doing the mortgage assignment, you will want to review the loan documents thoroughly. Consult a lawyer before proceeding in any real estate transaction so that you fully understand the ramifications of the deal and so that you can avoid any pitfalls.
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