When a person purchases a home by obtaining a mortgage, the purchaser becomes a mortgagor to the mortgagee. The mortgagee lends the money with which the mortgagor purchases the home. When the homeowner no longer wants the home, he may enter an agreement with another party to assume the mortgage. Assuming a mortgage without knowing the implications could land a young couple in trouble with its creditors.
When a homeowner conveys a mortgage to another person, the mortgage remains on the land. A buyer can assume the mortgage by signing an assumption agreement. Assuming the mortgage means that the mortgagor sells the home to the buyer, and the buyer takes over the mortgage payments. Assuming the mortgage renders the new owner of the home primarily liable to the mortgage for the payment of the loan. The original mortgagor remains secondarily liable on the loan as a surety. If the person who assumed the mortgage does not pay the mortgage debt, the lender can pursue the original mortgagor for payment of the debt.
Liability of a Seller
If you are thinking of selling your home and having the buyer assume the mortgage, you may want to change that line of thinking. If the buyer fails to make mortgage payments, the lender will come after you for those payments. In that case, you may find yourself taking hits to your credit record or paying for a house in which you no longer live.
If you do want to sell your home and have the buyer assume the mortgage, seek to modify the original contract. Put the buyer in your place as the person primarily liable for payment of the mortgage. Modifying the obligation to pay the mortgage will completely discharge you of liability for the mortgage. Therefore, if the buyer misses payments on the mortgage, the lender will only look to him for payment of the mortgage debt.
Assuming a Mortgage
On the other hand, a couple looking to purchase a home may want to assume a mortgage if the current interest rates exceed the interest rate on the mortgage he wishes to assume. In the past, that would have been an ideal situation for a couple wanting to assume a mortgage at a low interest rate. Today, most mortgages contain due-on-sale clauses. This permits the lender to demand full repayment of the loan if the mortgagor transfers any interest in the property without the lender’s knowledge. If the homeowner cannot pay off the entire loan, the lender can foreclose. Therefore, a person who purchased a house with a due-on-sale clause, would think twice about selling the home without informing the lender. This allows the lender to raise the interest rate to current levels and charge an assumption fee when the mortgagor sells the property. Therefore, if you wish to assume a mortgage to save money, you may not save as much money as you might have expected. Check the terms of the mortgage to determine whether the lender placed any restrictions on assumption of the mortgage.
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