A mortgage assumption is the ability to purchase property and keep the original terms of the contract in force after you take over payments. When interest rates are high, finding an assumable mortgage from years ago can save you many thousands of dollars over the life of the loan. Understanding how assumable mortgages work will help you decide of you want to seek one out.
A mortgage assumption means that you take over the existing mortgage. There are two types of mortgage assumptions--qualifying and non-qualifying. A qualifying mortgage assumption requires the buyer to go through a regular loan application process, in which credit, job history and income determine whether or not the buyer will be allowed to take over the existing mortgage. If the buyer qualifies, the lender allows him to maintain the original contract terms. A non-qualifying mortgage does not typically require proof of income, a credit check or a job history. The buyer simply takes over the existing mortgage and the lender allows the deed to transfer from the seller to the buyers.
The qualifying assumption sometimes comes with a 1 or 2 percent fee, paid to the lender in lieu of money the lender loses by not being able to write a new loan with current interest rates, closing costs and other revenue streams. A non-qualifying mortgage typically requires the down payment to be equal to what is owed on the mortgage at the time of the sale and the final sales price. This gets the owner all equity at the close. In both types of assumptions the seller should ask the lender to sign a liability release, meaning if the buyer defaults, the mortgage contract does not revert back to the seller.
Pros and Cons
The benefit of an assumable mortgage is getting a better interest rate and locking in terms of a previous contract. In addition, if there were things on the property that at one time passed inspection, but today would not pass, it removes the need for an inspection, which otherwise could stop the sale. The down side to an assumable mortgage is the large down payment requirement. If a seller has been paying on the house for many years, the down payment could be more than half the value of the property.
There are several things to consider with an assumable mortgage. If you plan to live in the house for several years, the large down payment may be worth the investment; however, if you plan on selling it in a couple of years, you may not want an assumable mortgage. If the market turns and you end up owing more than you can sell it for, you could lose the large down payment. If you do not plan on living in the house for several years or more, your cash may be better used in mutual funds or other investments.
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