An assumable mortgage is a loan that can be transferred to another party that would take over the responsibility for making the mortgage payments. The servicing lender would transfer the existing mortgage from the current liable party to a new party. Simply put, a buyer takes over the mortgage payment obligation and liability from the existing seller. After the mortgage has been transferred to the new buyer, the mortgage servicer should mail a letter stating the original mortgagee of the property has been released of any liability, and that he/she is no longer responsible for the mortgage on said property. The mortgage’s current rate, term, and balance are then the responsibility of the buyer of the property. If the property is sold for more than the current mortgaged amount, the buyer would have to obtain alternative financing or pay cash for the difference in the sales price. The buyer will also have to meet certain qualifications, standards, and will likely have to pay bank and title fees.
There are two types of mortgage assumptions. A simple assumption is the transfer of the liability between the seller and the buyer without the lender’s approval. Using this option, the seller still has liability until the mortgage is paid in full. If the buyer fails to make timely payments and the property goes into foreclosure, the seller may be held responsible. An assumption by novation is where the buyer of the property receives approval from the servicing lender. This typically involves an application and acceptable documentation from the borrower. The seller is then typically released from all future liability and responsibility of the mortgage.
There are only certain mortgages that can be assumed. Typically, conventional mortgages are not eligible; mortgages secured by the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) usually are. Both FHA and VA mortgages, have standard requirements that a buyer must meet to determine if they are eligible to take over the mortgage. There are many benefits to assuming a mortgage. Interest rates and lower costs may be more attractive to certain buyers. Fees are typically much lower than the cost of obtaining a new mortgage, and appraisals are not required. This may also eliminate any repair requirements.
Why would somebody want to take over a mortgage? The main reason a buyer would want to keep the current mortgage lien on a property, rather than obtain a new mortgage would be the interest rate. If the interest rate on the current loan is much lower than the buyer could obtain, assuming the current mortgage may be a better financial decision. However, the downside may be that the new borrower would have to pay the difference between the current mortgaged amount and the price they are paying for the property.