A mortgage assumption lets a homeowner transfer an existing loan to a buyer, who then is responsible for the remaining balance.
There are benefits involved, such as when interest rates are high. In these cases, mortgage assumptions provide the buyer with lower rates. However, the buyer still needs to qualify for the mortgage.
Many popular loans are assumable, such as FHA loans, USDA loans, and VA loans. Sometimes, a mortgage can be transferred to a family member after certain life events, such as when inheriting a property.
Read the rest of this article to explore pros and cons of mortgage assumptions, steps involved in assuming a mortgage, and more.
What are Pros and Cons of Mortgage Assumptions?
There are various advantages and disadvantages of mortgage assumptions to know about before you consider it for your situation.
Pros
- Buyers can take advantage of lower mortgage rates.
- Buyers might not have to apply for a new mortgage because they’ll take over the current one.
- For sellers, offering a mortgage assumption can enable them to request higher asking prices.
- Assumable mortgages don’t usually require a new appraisal. This can save the buyer some money.
Cons
- If the buyer has two mortgages to pay, this can increase their risk of defaulting.
- The buyer will have to qualify for the loan by meeting specific standards.
- The loan might not be sufficient to cover the home’s market value, meaning the buyer is responsible for paying the difference.
- Some conventional mortgages you get from private lenders aren’t assumable.
What are the Steps Involved in Assuming a Mortgage?
Before going ahead with a mortgage assumption, it’s important to know all the steps involved in the process.
- It’s important to check that the seller’s mortgage contract specifies an assumption clause.
- The buyer needs to meet the current loan’s debt-to-income requirements and credit score requirements. They need to show financial documents and employment history to prove they can take over the mortgage successfully.
- Depending on the situation, the buyer will apply for an additional loan if they can’t cover the equity with cash.
- They’ll have to pay closing costs, such as an assumption fee.
- A release of liability will be signed by the seller, removing their responsibility to pay the loan.
- The buyer will sign an assumption agreement. This means the transfer of the property and loan is made official.
What Does it Cost to Assume a Mortgage?
There are costs involved with assuming a mortgage. These include:
- Equity. The buyer might have to pay the seller for their equity, depending on how long the seller has owned their home.
- Assumption fees. If you’re taking a conventional loan, you’ll have to pay a percentage of the amount on the loan.
- Government-backed loan costs. You’ll have to pay fees that vary for different loans.
- Transfer taxes. You might have to pay these for assuming the mortgage, but the rules will vary in different states.
Can a Lender Deny a Mortgage Assumption?
The lender who funded the original mortgage will have to approve the new buyer, or it won’t sign the assumption. They’ll check that the buyer has an appropriate credit score and history, and that they can afford it by checking their income. After approving the buyer, they can go ahead and close on the home.
A buyer can be denied an assumable mortgage if they don’t have enough credit as it shows that they might not be able to make the monthly loan payments.
If you’re a buyer who’s denied a mortgage, there are important things you should do.
- Request a reason. It’s your right to ask the lender for a reason why your mortgage application is being denied. They will have to specify what’s preventing you from taking the mortgage, such as your debt-to-income ratio.
- Review a copy of your credit report. If there are errors in it that are preventing you from being considered for a loan, you’ll have to dispute them.
- Get in touch with the lender. It’s worth consulting the lender and asking them for help with the situation. They might provide advice on how you can navigate the process and be approved.
What are the Tax Implications of a Mortgage Assumption?
There are important tax implications to know about when dealing with mortgage assumptions. They’re the same as what you’ll have to consider when taking a new loan to buy a home.
- Tax basis. This is the amount your home is worth for tax purposes. A home purchased with a mortgage assumption will be treated the same as other home purchases. So, if you buy a home for $2 million and your mortgage assumption is $1.5 million, your basis will still be $2 million.
- Gift taxes. If you assume the loan from a relative who sells the home below the market value estimate, the cost difference is treated as a gift for tax purposes.
- Property tax reassessment. Your tax liability might increase as transferring ownership of the home can result in a reassessment tax.
What are the Legal Obligations of Mortgage Assumptions?
There are some important legal obligations you’ll have to consider before taking a mortgage assumption.
- Default mortgages. If you enter the situation of buying the property when foreclosure is occurring, you might also have to deal with foreclosure unless you can cover all the outstanding payments.
- Due-on-sale clauses. This common mortgage clause specifies that the loan balance is due as soon as transfer occurs. If the property is being transferred from one family member to another, these could be exceptions to the clause.
- Liability after assumption. The original borrower might be released from the debt on the loan, but this isn’t a given. It’s essential for the seller to request a formal release from liability in writing.
- Lock-ins on interest. The assumed mortgage legally maintains the original interest rate.
- Deed transfer. For the mortgage assumption to be legal and valid, it requires a deed transfer that’s recorded with the county. This prevents ownership disputes in the future.
Do You Need a Lawyer for a Mortgage Assumption?
There are times when hiring a lawyer can help you navigate a mortgage assumption process, especially if you’re dealing with a complicated situation, such as divorce. A lawyer from ContractsCounsel, an online legal network connecting clients with vetted lawyers, will assist you in various ways. These include:
- Checking that all contracts and legal agreements are reasonable and sound.
- Protecting your interests, such as in terms of getting a release of liability for the original borrower.
- Considering all appropriate state laws to ensure compliance.
- Helping you get new financing you require.
