BluefoxToday blog : Assuming A Mortgage

Assuming A Mortgage

 

This past week William Walton asked me if I would post a blog on Assuming A Mortgage.  William has been getting some questions on what is involved in  Assuming A Mortgage and wanted to see what is involved in doing that.

First of all an Assumption of a Mortgage is in the simplest terms:

An agreement between the buyer and seller where a buyer takes over a seller's mortgage and becomes responsible for making the monthly payments.

This can be a big advantage to both the Buyer and the Seller.  The Buyer purchases the house without incurring some of the closing costs involved in the purchase of a home, and the Seller is likely to get a higher selling price for his house.  Also the Buyer assumes the mortgage at the Seller's existing interest rate.  Another advantage to the Buyer is that the Buyer will pay off the house faster because he/she is already a number of years into the existing mortgage. This leaves one to wonder with these advantages why do we not see more Buyers assuming mortgages?  The answer is a simple.

  1. A Buyer can't just take over a Sellers mortgage, they still have to qualify for the existing mortgage, and go through the same application process, minus an appraisal.
  2. Just because a Buyer assumes a mortgage and takes over the payments does not mean that the Seller is no longer liable for the mortgage (I will come back to this point later)
  3. Many Buyers do not have the necessary money to be able to pay the Seller the difference between what they own on the existing mortgage and what the Seller is selling the house for.  For example the Seller is selling the house for $200,000 and still owes $150,000 on the existing mortgage.  This means that the Buyer will need to come up with $50,000 to give to the Seller, because the bank will not allow the additional $50,000 to be added to the existing loan.
  4. It does not make any sense for a Buyer to assume a mortgage that has a higher interest rate than the rate that they can obtain a new mortgage at.  This is one of the main reasons why we do not see Mortgage Assumptions today.  But when interests rates are higher than then the interest rate on the existing mortgage, then it makes sense to do it.  I am a good example of this.  When I purchased my home in 1981, interest rates were 15%.  The Seller that I purchased my house from had a CHFA Mortgage on the house for 7.75% and he had only owned the house for two years.  I assumed the mortgage by giving him the difference between what he was selling the house for and what he owed ($7,000), and my monthly payments were half of what they would have been.
  5. Not all mortgages are assumable.  For example government loans like FHA, CHFA, and VA are usually assumable, but conventional loans usually are not.
  6. This one ties in to #5, even if a loan is assumable, not all Lenders or Investors are willing to allow it.  Just because FHA allows their loans to be assumed, does not mean that the Lender will allow the transfer in ownership, even if it appears that the new Buyer is a good risk.  Also the bank does not make as much off of the transaction on a Mortgage Assumption as they would on a new purchase (lower closing costs and lower interest rate)

Before I close this blog I want to go back and explain the second reason that I gave for why we do not see more mortgages being assumed.  You have basically two categories of Mortgages Assumptions:

  1. The first is the Buyer assumes the Sellers mortgage and the Seller is released from all the liabilities, obligations and responsibilities that they have related to the mortgage.  This one is simple and a no brainer  if the market conditions are right.
  2. But the second is not such an easy decisions for the Seller.  This is because even though the bank allows the Buyer to assume that mortgage, they do not release the Seller from the liabilities, obligations and responsibilities related to the mortgage.  That means that if the Buyer defaults on the mortgage, guess who is still liable.  You guessed it, the original holder of the mortgage.  This is a big risk on the part of the Seller and one that most Sellers are not willing to take no matter how much the Buyer is willing to pay them for the house, or how long the house has been sitting on the market.

Even though Mortgage Assumptions are rare these days, I would expect that Mortgage Assumptions will become a much bigger part of the home buying process once interest rates start to rise again.  I hope this has helped explain what is involved in Assuming A Mortgage, and why a Buyer and Seller may or may not agree to do one.  I would advise any Seller  who is entertaining allowing a Buyer to assume his/her mortgage, that they first check their Truth In Lending Statement, Note, or Mortgage to see if it is assumable.  Then contact their Lender to see if they allow a Buyer to assume their mortgage, and  if they will continue to be liable for the mortgage or not.

Again I hope this was helpful, and please feel free to ask questions if something is not clear.

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308, gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage.

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or souto@snet.net

Comment balloon 27 commentsGeorge Souto • November 13 2010 02:32PM

Comments

George, For all the reasons you pointed out there are probably a lot of Realtors that have never been involved in a sale with an assumable loan...we see them with the Rural development and V.A. loans, but for the most part the new buyer gets their own mortgage and the seller discharges theirs. I can see a time (coming) when the rate of 4.5% (offered now) will look like great deals in the future (and folks will look for assumable's). My first home had a rate of 13.5% it's hard to believe looking at the rates now.

Posted by Steve Loynd, 800-926-5653, White Mountains NH ( Alpine Lakes Real Estate Inc., ) over 7 years ago

George, I was under the belief that in CT, assumable mortgages are not allowed, even though we get taught on using them when we take our basic real estate classes.

Posted by Ed Silva, Central CT Real Estate Broker Serving all equally (RE/MAX Professionals, CT 203-206-0754 ) over 7 years ago

Good article and makes good points on the assumable mortgage process. When its good and when its not.

You cleared a couple of things up for me. Nice.

Posted by Paul Lesieur (203kloanmn) over 7 years ago

Great information, George.  I figured that it just wasn't done anymore because all the closings that I have sat through have specifically stated that the mortgages were not assumable (which is understandable because rates are so low that lenders would certainly lose money).  But as you stated, they may become part of the picture if interest rates rise.  Thanks for the post.

Posted by Peggy Chirico, REALTOR® 860-748-8900, Hartford & Tolland County Real Estate (Prudential CT Realty) over 7 years ago

Steve, yes it is hard to believe that the rates were ever up that high, but they were and that is the type of market that is prime for assuming mortgages.

Ed they allowed in Connecticut, the problem is that Lenders might not be willing to do them.  As you know at McCue we do a ton of FHA, CHFA, and VA loans, and all of those allow for the Loan to be assumed, however, at this time and for a long time now it has not made any sense to do them.

Paul glad I could be of help.

Peggy, they are not assumable without the prior approval of the Lender, and right now Fannie Mae does not have a provision for assuming the loans that are backed by them, but FHA, CHFA, and VA do.  But just because they allow their mortgages to be assumed does not mean that Lenders and Investors will go along with it.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 7 years ago

This is great advice George. Many times Buyers think they can just assume a Sellers mortgage and don't understand they have to qualify. Same in a divorce situation. One partner may not be able to handle the mortgage on their own, even though it is in place on the property. 

Posted by Al & Peggy Cunningham, Brokers, Our Family Wants To Help Your Family! (RE/MAX West Realty Inc., Brokerage) over 7 years ago

George - I've had this same conversation a few times in the past few months.  Like you, I too just think this is not the market for assumable loans right now.  With interest rates as low as they are, buyers can get a better purchase loan than assuming an older loan.  I think a time will come where assumables will start to make sense.

Posted by Donne Knudsen, CalState Realty Services (Los Angeles & Ventura Counties in CA) over 7 years ago

George - I just thought that mortgage companies didn't allow assumable mortgages any more, but your explanation of why Sellers wouldn't want to do (for liability reasons) and why Buyers in this market wouldn't want to do them (low interest rates) makes sense. 

Posted by Gail Robinson, CRS, GRI, e-PRO Fairfield County, CT (William Raveis Real Estate) over 7 years ago

George terrific explanation of why and how a mortgage can be assumed.  As you rightly stated market condition has to be considered and with the present low rates it probably would not make sense.  Also for seller this could be risky business.

Posted by Jennifer Fivelsdal, Mid Hudson Valley real estate connection ( JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571) over 7 years ago

George, you always put out such great information for everyone especially sellers and buyers.  You sure hit the nail on the head about todays assumable mortgages being more valuable in the future as rates rise.

Posted by Nick T Pappas, Madison & Huntsville Alabama Real Estate Resource (Assoc. Broker/Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, @HomesBirmingham & Providence Property Mgmnt, LLC Huntsville AL) over 7 years ago

George - you certainly have clarified some things  for us. You are always so thorough! Seems to me that it is pretty risky for the sellers, so it's uderstandable, in this market, why these are pretty rare.

Jeff

Posted by Jeff Dowler, The Southern California Relocation Dude - Carlsbad (Solutions Real Estate ) over 7 years ago

Shucks.  I've done a number of buyer assumptions representing buyers or sellers.

The reason we don't see as many these days as in the 1990s is because the equity payment from the buyer to seller grew as home values grew. 

Now that property values have dropped dramatically, I believe we may be seeing more.  I closed one on a FULLY ASSUMABLE FHA LOAN last year and the cost to the buyer was a nominal $1000 to the seller plus closing.  Those assumptions have been extremely rare of late, but a coming back due to the much lower market values of the assumable loans.

All that said, the "window of opportunity" for buyers for fully assumable FHA and VA loans is almost closed.

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) over 7 years ago

Great explanation of assuming the mortgage George. I hit the suggest button hoping this one gets noticed.

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) over 7 years ago

George,

Interesting subject.  Sounds like a good idea for some...

Ann Hayden in Wildwood, MO

Posted by Ann Hayden, SelectAnn.com (Berkshire Hathaway HomeServices Select Properties-St. Louis Missouri) over 7 years ago

Al and Peggy, mortgages assumptions are not automatic, in fact right now one would be very unlikely, but under the right situation it can be a win win for Buyer and Seller.

Donne, I agree.  Question for you, are the Lenders in your area even considering approving a request for a mortgage assumption right now?  We have not had a request for one in a long time, but right now if one was to come in it would probably not be approved.

Gail you are also right about Lenders not doing them right now.  Once the market conditions change hopefully they will start to approve them again, but like I commented to Donne, right now we would not.

Jennifer agreed, it can be very risky for the Seller if the Lender does not release them from liability on the loan.

Nick can you imagine what a selling tool they will be if rates get up to the 7% and 8% again, and the buyer was able to assume the mortgage at 4.5%.

Jeff, we have not been asked to do one in years, and it will probably be a while longer before this starts to become an option again.

Lenn, the conditions must have been perfect for a Buyer to actually consider doing a mortgage assumption these days.  The home values might be getting closer again, but there is a big difference between the interest rates of two to three years ago, and what they are now.

Bill Thank You!!!

Ann, it might not be a good time right now for these, but hopefully in the not to distant future they will become an option again.

 

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 7 years ago

George, you hit this one right on the head. Now, I can more than adequately address the question of assumability with buyers who want to know if they can assume a mortgage. Thank you so much!!!

Posted by William James Walton Sr., Greater Waterbury Real Estate (WEICHERT, REALTORS® - Briotti Group) over 7 years ago

George, absolutely!  This is probably another one of those little things that buyers/aren't aware of how important/valuable an assumable mortgage can be.

Posted by Nick T Pappas, Madison & Huntsville Alabama Real Estate Resource (Assoc. Broker/Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, @HomesBirmingham & Providence Property Mgmnt, LLC Huntsville AL) over 7 years ago

Good stuff George -- I remember in the 80s when I purchased my first home that assumptions were pretty prevalent.  I know where to look if a buyer inquires: your post here!!! :)

Posted by Chris Olsen, Broker Owner Cleveland Ohio Real Estate (Olsen Ziegler Realty) over 7 years ago

William, you are very welcome :)

Nick you are right, it can be a great tool for the Seller if the Lender allows the loan to be assume.

Chris, like I said in the post I assumed my mortgage in 1981 when interest rates were going through the roof, and the Seller had a rat that was just about half of what I would have gotten on a new mortgage.  It was a no brainer for me, and the Seller got his full asking price.  As we see rates go up again, we will see more Buyers trying to assume mortgages with the present low interest rates.  Hopefully when that begins to happen, Lender will be open to the process.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 7 years ago

Great information George - thank you for the explanation.

Posted by Karen Bernetti over 7 years ago

Karen you are very welcome

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 7 years ago

George - While I have had a few requests about assumable loan options, after collecting all the pertinent info, I told all prospects that they would be better off getting a new purchase loan than assuming the one of the sellers of the home they wanted to buy. 

So, to answer your question, I don't really know if any of my lending sources would accept an assumable loan, I've never had the need to pursue an assumable loan app.

Posted by Donne Knudsen, CalState Realty Services (Los Angeles & Ventura Counties in CA) over 7 years ago

As always, you are out here helping us all out with a better understanding of mortgages.

Posted by Celeste "SALLY" Cheeseman, (RA) AHWD CRS ePRO OAHU HAWAII REAL ESTATE (Century 21 Liberty Homes) over 7 years ago

George,

I had one client that had called his mortgage company and asked them if his loan was assumable and they told him YES.. so he calls me and wants me to advertise it that way.  I had him call the company back because he would still be accountable for the mortgage also.  He didn't think so but agreed to do that and then called me. Of course he was still going to be liable for the mortgage so he decided that he did not want to do that..

Posted by Judi K Barrett, BA, Integrity Real Estate Services -IDABEL OK (Judi Barrett~Integrity Real Estate Services~Idabel, Oklahoma) about 7 years ago

George,

Assumptions haven't been much in the headlines lately, but as you say they'll coming back when rates rise in a little bit.

Posted by Esko Kiuru about 7 years ago

George,

With every change in the market, some of the old stuff, seems to come back:)   I would suggest to people, that they discuss this option with their attorney, if they really were interested in the product.  This explanation of yours, will help anyone to see the light.

Posted by Frances C. Rokicki, Broker-Mentor,CRS (Fran Rokicki Realty, LLC) about 7 years ago

George Souto you wrote this blogpost almost 5 years ago (wow) - so far assuming mortgages has not been an issue, however, interest rates will go up at some point, which is predicted for the end of this year. I very much believe that assuming mortgages will be come more frequent as these interest rates rise. 

What is your opinion now on assuming mortgages? How in the world would one value a mortgage to be assumed at let's day 3.25% when the current [future] interest rate is at 5.5%? 

Looking forward to your suggestion.

Posted by Susanna Haynie, Colorado Springs Realtor GRI CNE MCNE ePro MRP (CO-RE Group, LLC -Real estate sales and services) about 3 years ago

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