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Assumable Mortgages...Benefits For
The Buyer And Seller
The Buyer And Seller
Assuming a mortgage is a high risk transaction that you should enter in with caution.
When a homebuyer assumes the mortgage of a homeseller it's referred to as an
assumption. The buyer is responsible 100% for the seller's mortgage. It is just as if the buyer
had taken the mortgage in his or her own name.
Considering our current low mortgage rate environment, finding an assumable mortgage is
like discovering a unicorn in your backyard. This mortgage strategy only works when the
current mortgage rate is higher than the existing rate. For example, if the seller bought the
house when mortgage rates were 3.5% and the current rate is 6.5%, then it makes good
sense for the buyer to assume the seller's mortgage.
Lenders reaction to assumable mortgages.
Lenders have countered this move by inserting a due on sale clause in the mortgage
contract. This means that if the house is sold the seller has to pay off the loan. The lender
would rather have the money to lend on a new loan at 6.5%, and get the 3.5% loan off the
books. The lender also has to approve the buyer. This is a must so that buyer with poor credit
and buyer who would be declined for a mortgage do not circumvent the system. Back in the
1970s and 1980s lenders had no choice but to allow assumable mortgages.
Advantage to the buyer when he is given an assumable mortgage.
So we can see that there is a clear rate advantage to the buyer taking an assumable
mortgage. But there is also an advantage to the buyer if he does not have a down payment.
For example, if the house is selling for $250,000 and the balance on the mortgage is
$175,000, then the seller would have to give the buyer a second mortgage for $75,000.
There is risk to the seller and a huge advantage to the buyer. In this scenario don't expect the
price to be negotiable, and also, don't ask for closing costs. The buyer would in all likelihood
pay full asking price.
From the buyer's point of view, he is looking for a buyer who has cash and who simply needs
a great mortgage rate. In our little example, a buyer would want the seller to pay the $75,000
out of pocket. The buyer would then be in a position is cover all the closing costs.
Release of Liability from the lender.
The greatest fear for a seller is having the buyer not pay the mortgage. The seller has given
up ownership to the house, but he is still on the hook for the liability, namely, the mortgage. To
protect the seller, a Release of Liability must be obtained from the lender. This document
basically says that in the event that the mortgage is not paid the lender would go after the
buyer not the seller. The Release of Liability is also useful if the seller wants to purchase
another property. It proves to the new lender that the past liability is no longer an issue.
FHA and VA loans are assumable.
Loans guaranteed by the VA or insured by the FHA are assumable. For home loans closed
before December 14, 1989 anyone can assume an FHA loan. The corresponding date for
the VA is March 1, 1988. If the loans closed after these dates then the FHA and the VA has
to approve the buyer. There is a small fee for the paperwork.
Garn - St. Germain Act of 1982.
A mortgage is explicitly assumable under the Garn- St. Germain Act of 1982. It does not
matter whether the lender inserts his due on sale clause or not. This Act addresses divorce
and death of a borrower. For example, Liz and Harry gets divorce. The house goes to Liz.
The mortgage is assumable by Liz. The same reasoning applies in the event that Harry dies.
Liz gets the house and also the mortgage. And who said life wasn't fair?
When a homebuyer assumes the mortgage of a homeseller it's referred to as an
assumption. The buyer is responsible 100% for the seller's mortgage. It is just as if the buyer
had taken the mortgage in his or her own name.
Considering our current low mortgage rate environment, finding an assumable mortgage is
like discovering a unicorn in your backyard. This mortgage strategy only works when the
current mortgage rate is higher than the existing rate. For example, if the seller bought the
house when mortgage rates were 3.5% and the current rate is 6.5%, then it makes good
sense for the buyer to assume the seller's mortgage.
Lenders reaction to assumable mortgages.
Lenders have countered this move by inserting a due on sale clause in the mortgage
contract. This means that if the house is sold the seller has to pay off the loan. The lender
would rather have the money to lend on a new loan at 6.5%, and get the 3.5% loan off the
books. The lender also has to approve the buyer. This is a must so that buyer with poor credit
and buyer who would be declined for a mortgage do not circumvent the system. Back in the
1970s and 1980s lenders had no choice but to allow assumable mortgages.
Advantage to the buyer when he is given an assumable mortgage.
So we can see that there is a clear rate advantage to the buyer taking an assumable
mortgage. But there is also an advantage to the buyer if he does not have a down payment.
For example, if the house is selling for $250,000 and the balance on the mortgage is
$175,000, then the seller would have to give the buyer a second mortgage for $75,000.
There is risk to the seller and a huge advantage to the buyer. In this scenario don't expect the
price to be negotiable, and also, don't ask for closing costs. The buyer would in all likelihood
pay full asking price.
From the buyer's point of view, he is looking for a buyer who has cash and who simply needs
a great mortgage rate. In our little example, a buyer would want the seller to pay the $75,000
out of pocket. The buyer would then be in a position is cover all the closing costs.
Release of Liability from the lender.
The greatest fear for a seller is having the buyer not pay the mortgage. The seller has given
up ownership to the house, but he is still on the hook for the liability, namely, the mortgage. To
protect the seller, a Release of Liability must be obtained from the lender. This document
basically says that in the event that the mortgage is not paid the lender would go after the
buyer not the seller. The Release of Liability is also useful if the seller wants to purchase
another property. It proves to the new lender that the past liability is no longer an issue.
FHA and VA loans are assumable.
Loans guaranteed by the VA or insured by the FHA are assumable. For home loans closed
before December 14, 1989 anyone can assume an FHA loan. The corresponding date for
the VA is March 1, 1988. If the loans closed after these dates then the FHA and the VA has
to approve the buyer. There is a small fee for the paperwork.
Garn - St. Germain Act of 1982.
A mortgage is explicitly assumable under the Garn- St. Germain Act of 1982. It does not
matter whether the lender inserts his due on sale clause or not. This Act addresses divorce
and death of a borrower. For example, Liz and Harry gets divorce. The house goes to Liz.
The mortgage is assumable by Liz. The same reasoning applies in the event that Harry dies.
Liz gets the house and also the mortgage. And who said life wasn't fair?
Fees to look for on your
Good Faith Estimate
(GFE)
Good Faith Estimate
(GFE)
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