In the mortgage industry, assumption of a mortgage loan refers to the ability of a mortgage loan to be transferred from the seller of a property to an interested buyer, who then takes over making mortgage payments on the seller’s pre-existing loan.
When interest rates are high, loan assumption can provide homebuyers with access to exceptional interest rates through the seller’s mortgage, the rates of which may have been fixed advantageously low. For first time home buyers, assuming a loan can be a great way to ease into the financial pressures and responsibilities of a mortgage. However, as beneficial as this option can be, loan assumption does come at some cost as well.
Although many lenders are willing to allow and work with mortgage assumptions, mortgage assumption depends wholly on the type of loan secured by the seller. When discussing a possible home purchase, borrowers should inquire about the possibility of mortgage assumption; though, since the majority of mortgages cannot be assumed due to program regulations, most borrowers will not have this option.
In order to assume a pre-existing mortgage, a borrower must still satisfy the requirements of that mortgage, including standards for income, employment, debt-to-income ratio, and credit history. Borrowers with low credit scores or insufficient income may not qualify, and those that do will still need to make a sufficient down payment.
Borrowers assuming a mortgage will be subject to the same loan terms agreed upon by the seller for the original mortgage. Before committing to a loan assumption, borrowers should be aware of the fine-print details of the mortgage, as it may include detrimental clauses and terms such as prepayment penalties. If necessary, hire a professional to review it; remember, it is better to be safe than sorry.
Although the seller has paid into the mortgage, the buyer will still be responsible for paying the full price of the home. Basically, if a seller still owes $90,000 on a home and is asking for $120,000, buyers will be held responsible for paying the remaining $30,000 that has already been paid into the mortgage. In order to pay this sum, homebuyers without a large amount of cash in savings can opt to secure a new mortgage loan, although the rates for the second mortgage loan will often be less beneficial.
While in theory a mortgage assumption presents many advantages over a new loan, not all loan assumption transactions benefit the buyer. Essentially, borrowers should only assume a loan if unable to secure better rates and terms through a standard loan program. With interest rates remaining historically low, mortgage assumption may not currently be the best option, and most sellers with higher rates have already refinanced to reduce their mortgage interest rates.
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