It is possible to take over someone else's mortgage legally by either assuming the loan or doing a wrap-around mortgage. Before pursuing this option, it is important to know what is legal in your state and whether the existing lender will allow the mortgage to be assumed. Creditworthiness and/or a down payment may be required. While it makes sense for most people to purchase a home with a new mortgage, taking over an existing mortgage may give the buyer a lower interest rate and lower closing costs.
Research Your Options
Request a copy of your credit report or pre-qualify for a mortgage with a lender to determine your creditworthiness. Discuss your loan options with a lender. The easiest way to purchase a home is to qualify for your own mortgage. In the event that this is not possible or circumstances make an assumable mortgage more attractive, it is important to be aware of your credit, which can still be a factor in qualifying for an assumable mortgage.
Ask the seller about the existing mortgage and lender. The existing mortgage type will determine if you can legally assume it. FHA and VA loans are generally assumable, which means that the balance of the mortgage may be transferred to the buyer. The guidelines for assuming an FHA or VA loan depends on which type of loan it is and the date of the original mortgage. In most cases, you will still need to meet creditworthiness and borrower requirements similar to those for a new mortgage. If the existing mortgage is not an FHA or VA loan, it is less likely that it is assumable.
Ask the seller -- if the existing loan is not an FHA or VA loan -- whether the current mortgage has a “due on sale” clause. A due-on-sale clause can cause the seller to be forced to pay the first mortgage in full when the home is sold. While this clause does not always apply to mortgages and is not always enforced, it is very important that the seller and the buyer understand this clause. While wrap-around mortgages are legal in most states -- even with such a clause -- the clause can be dangerous. A wrap-around mortgage is a second home loan between the seller and the buyer. This second mortgage wraps around the first one. The buyer agrees to make to the seller payments that include the cost of the first mortgage.
Apply to Assume the Loan
Apply to assume the loan if it is an FHA or VA mortgage. You may go to an FHA- or VA-approved lender and apply to assume the mortgage. The benefit of assuming a mortgage rather than getting a new one is that you may be able to take advantage of a lower interest rate than is currently available. Additionally, the closing costs are significantly reduced, the seller is released from all liability and the old mortgage and its terms will be yours. In the case of a wrap-around mortgage, make sure you have proof, such as the receipt, showing that the seller is paying the first mortgage with your payment each month.
Negotiate the terms of the sale and the wrap-around mortgage with the homeowner if you have agreed to this kind of mortgage. Obtain legal consultation before signing a contract with the seller, as this will be a legal document. The seller will make the decision on whom to sell the home to, may require a down payment, and sets the monthly payment amount. The wrap-around mortgage carries some risk with it, but it has been used to buy and sell homes for decades. Buyers using a wrap-around mortgage may still deduct the interest on their income taxes.
- Buyers using a wrap-around mortgage may still deduct the interest on their income taxes.
- In the case of a wrap-around mortgage, make sure you have proof, such as the receipt, showing that the seller is paying the first mortgage with your payment each month.
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.