Mortgage Assumption: Is It Something You Should Even Consider?

Occasionally, a homeowner wants to get out from under a home mortgage quickly because of a career move, divorce, or some other reason—and that can open the door to an opportunity you might not otherwise have. You have a chance to assume the existing mortgage and get a great deal on a house.

Should you consider this option? Maybe—but both you and the seller need to clearly understand the potential risks before you decide what you're willing to do.

What is a mortgage assumption?

In general, a mortgage assumption means the buyer takes over the seller's existing mortgage payment every month for the remainder of the home loan. The buyer gains ownership interest in the home this way. It's a particularly convenient option for a seller who doesn't have a lot of equity built up in a house and finds himself or herself needing to sell. It also works well for a seller who may not have the money for a hefty downpayment to the bank or a robust credit score that will pass underwriting.

Is mortgage assumption really possible?

Mortgage assumption is a way of creating owner-assisted financing. It used to be a fairly common occurrence before home loans became easy to get in the 1980s and 1990s, and it's becoming a much more common thing again now that loans are becoming more restrictive.

What kinds of mortgage assumptions are there?

You can assume someone else's mortgage in a private agreement without involving the bank hardly at all—although that doesn't give the seller much security. The seller remains listed on the original mortgage until the buyer is able to refinance out of the seller's name, usually several years in the future. 

Mortgage novation is a much more formal arrangement. With novation, the bank has to agree to allow the mortgage to be signed over to the buyer, which releases the seller from his or her legal obligation to repay the loan. Not all mortgage agreements (or banks) will allow novation, so novation isn't always possible.

In both situations, there are some additional risks for the buyer that should be considered.  The buyer may be taking on a mortgage for a house that is "upside down"—which means the mortgage is more than the house is actually worth due to changes in the market. The buyer may also be agreeing to an interest rate that's now unreasonably high by current standards.

Whatever deal you are considering on a home, an attorney who provides real estate legal services can help you understand your options and risks.

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