What is an Assumption of Mortgage?

An assumption of mortgage is the term applied to a case where the buyer assumes the debt of the seller, who was the previous mortgage holder. The practice offers several advantages both to the buyer and the seller, but is not one that is favored by lenders. Therefore, assumptions of mortgages are more difficult to get through. Rather, lenders prefer a more traditional approach that involves selling the house, paying off the original mortgage, and then the issuing of a new mortgage.

When an assumption of mortgage is done, the buyer must agree to all the terms of the original mortgage. This means not only agreeing to pay the outstanding balance, but also agreeing to the interest rate. Often, the assumption of mortgage is a good deal for a buyer, who may seek to use this approach at a time when market rates are higher than what the loan rate is on the particular mortgage in question. For example, if a buyer cannot get a new mortgage for a rate lower than 7.5 percent, and is offered an assumed mortgage with a rate of 5.5 percent, it makes sense to choose that lower option. In addition to that lower rate, the closing costs on an assumed mortgage are often lower than they are on a new mortgage.

Generally speaking, in the past, lenders had little to say about an assumption of mortgage, as long as the buyer met the qualifications. Beginning in the 1990s, more lenders began inserting language in new loans known as due-on-sale clauses. This, effectively did away with most assumed mortgages because it required the outstanding balance, and mortgage, to be closed whenever a sale was made. Lenders may still allow an assumption of mortgage even with this language, but the interest rate will likely be at the market rate.

Some assumptions are still possible despite this language, but these are very specific. For example, in the United States, Federal Housing Administration and Veterans Administration loans allow others to assume the mortgages. Further, title transfers in the case of death or divorce also generally allow others directly related to the previous owner to assume the mortgage.

An assumption of mortgage offers some advantages and disadvantages to the seller as well. Among the advantages, it makes a home easier to sell during times when mortgage rates are higher, and it also can quicken the selling process. The disadvantages are that the seller may not get as much money for the home and, in some cases, the seller may still ultimately be responsible if the buyer cannot pay. This also means that the seller may have a harder time getting another loan because they are still a responsible party on the assumed mortgage.