What should I know about assumable mortgage loans?


Assumable mortgage loans are those that are transferred fully along with all obligations from a property seller to a new buyer. The new buyer is expected to pay the difference between remaining debt and price wanted by the owner. The remaining mortgage obligations of the seller are assumed by the buyer. Those loans are generally pursued from buyers who would like to get nice low rates with an old loan because they cannot get as nice rates on the current market. Obviously, assumable mortgage loans are not among lenders' favorites who'd much prefer to contract a new loan with higher rates with the new owner instead of keeping the old loan with low rates.

Since most lenders protect themselves with a due on sale clause, assumable mortgage loans are hard to find. However, FHA and VA loans have always been assumable; only the new buyer has to undergo approval by the lender or underwriting agency. If you are offered a deal to assume existing homeowner's mortgage, and you agree, this will mean that you have to take all accompanying mortgage obligations to yourself. It is an obvious benefit to the buyer who is going after the existing lower rates, but the seller should demand compensation as well, for example get higher price for the house.

Sometimes a lender with a due on sale protecting feature on the mortgage will agree to an assumable mortgage loan. He will want to adjust rates up, and avoid new closing costs. Also, the lender may agree to the assumption as it is - without adjusting rates, but may ask for compensating cash upfront - an assumption fee (app. 1%).

Liability in Assumed Loans

If you are a seller, at the time of assumption you have to request from the lender a written release of liability. If the new buyer happens to default on payment, you have to be sure the collection agency will not come after you. According to the state law, even is assumption is successful, sometimes the state law may hold both seller and buyer liable in case of payment defaults until the loan is fully repaid.

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