Assuming a mortgage loan allows you to purchase a home by agreeing to be personally liable for any remaining balance of a mortgage loan that was originally acquired by the previous owner of the home. It's an easy way to purchase a home with a small amount of cash, if the seller agrees to relinquish his interest in the property and the lender agrees to allow a buyer to assume the mortgage at the interest rate stated on the reduction certificate. The seller may also request that your down payment covers the amount of equity the seller has in the home.
The seller’s mortgage loan agreement may include an alienation clause or due-on-sale clause, which requires the borrower to pay the entire amount of the mortgage loan upon selling the property to a prospective buyer. However, the lender may agree to allow a borrower to assume the mortgage at an interest rate that is near the current market rate for the particular mortgage loan or at the same rate as indicated on the seller’s mortgage loan agreement.
A reduction certificate is a document that shows the remaining balance of the mortgage loan, including the interest charges and the maturity date of the loan. It is a requirement, if you're planning to purchase a home that is subject to a mortgage, and you agree to assume the mortgage.
Mortgage Assumption Agreement
The mortgage assumption agreement is a contract between the buyer, seller and the lender. The agreement includes words, demonstrating that the seller agrees to convey property to the buyer, and the buyer agrees to comply with the payment obligations under the mortgage loan agreement between the seller and the lender. As a buyer, who is assuming a mortgage loan, you are required to sign the contract in order to assume the mortgage and acquire interest in the property along with the seller and the lender’s signature.
Release of Liability
The mortgage loan agreement may not release the seller from liability. If you assume the mortgage, the seller remains secondarily liable for mortgage, unless the lender agrees to release the seller for any remaining portion of the debt. If the lender agrees to release the seller from being personally liable for the mortgage, the seller will be required to obtain the release of liability form at the time the property is sold. Usually, if the buyer is deemed creditworthy by the lender, the lender may agree to grant a release of liability to the seller.
The seller must submit a request for credit approval for a substitute mortgagor, if the seller wants to be released from liability from the loan. You will be required to submit a mortgage application for approval with supporting documents to show your income and monthly debt, and the lender will determine whether you are authorized to assume the mortgage based upon the lender’s underwriting guidelines and credit analysis. Depending on the lender, you may also be eligible for secondary financing with new mortgage repayment terms in addition to the terms of the assuming mortgage.
The lender determines whether there are any restrictions on your ability to take title to the home subject to a mortgage. It often depends on the terms and conditions of the mortgage loan agreement between the lender and the seller. Determining your creditworthiness to assume the mortgage may be a requirement by the lender, regardless of whether the seller remains secondarily liable for the loan. Some lenders may invoke an acceleration clause, if the buyer refuses to undergo a credit analysis.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.