Assuming an existing loan as opposed to getting a new one can be smart if the current terms are less favorable than at the time of the original loan. When you assume a mortgage, you take over the existing payments on a loan as opposed to starting over with a new one. However, if current rates are better, you likely want to go with a new loan because a lender won't let you modify the loan before it is assumed.
Modification
Most modifications are due to rates dropping after the loan origination. Many lenders offer modifications for a small, flat fee. The borrower gets a lower rate and the lender doesn’t risk losing the loan to refinance. Modifications are usually available at any time. However, if your mortgage contains an assumption provision, the lender will not agree to modify it once the process of assuming the mortgage begins.
Documentation
For a mortgage to be assumable, the original documents must note that this can be done. Typically, assumable mortgages are done on a wholesale basis as opposed to case-by-case. Either your original loan documents allow the mortgage to be assumed, or they don’t. If you modify the loan, it is highly unlikely that the modification will add or remove an assumption provision as the ability to assume a mortgage is not relevant when modifying a loan.
Qualifying
The reason an individual would seek to modify a mortgage before assuming it is to get the lower rate to make it easier to qualify. When a mortgage is assumed, the new borrower must qualify under the lender’s debt-to-income ratio guidelines. The new borrower can’t get a modification for the simple reason that he doesn’t have the mortgage yet. Meanwhile, the old owner can’t get a modification because the lender knows he will be giving up the mortgage. If the new borrower can’t qualify under the existing terms of the loan, his only option will be to seek a refinance with another lender who will qualify him.
Assumption
The new borrower can’t take any action beyond assuming the mortgage until the assumption is final and the mortgage is in the new borrower’s name. Once the lender approves the transaction, both the new and existing borrower will execute documentation transferring the mortgage. Once the mortgage is in the new borrower’s name, he can move forward and request a modification at that time.
References
Writer Bio
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.