written by: Baby Rani•edited by: Donna Cosmato•updated: 6/29/2011
Assumable mortgage is the process of transferring the mortgage of a seller to a potential buyer. This happens when the current interest rates are higher than rates that were in vogue when the seller had purchased the property.
slide 1 of 6
Assumable mortgages are such that they can be transferred from one owner to another owner without any alteration in the terms of the loan. This type of mortgage becomes an advantage when the interest rate is lower on the original mortgage than at the time of the sale. Under an assumable mortgage, the transfer of the mortgage can be effective only if the original owner of the loan agrees to it.
slide 2 of 6
Assumable Mortgages—How It Works
An assumable mortgage is a part of home financing in which a new owner assumes the existing mortgage while purchasing a piece of property. It allows the buyer of the home to take over the seller’s mortgage in the process of purchasing the home. All the obligations under the mortgage are transferred to the new buyer. New home owners usually go for this kind of mortgage when the existing interest rates are very high. While assuming a mortgage, the buyer has to pay only the interest which was accrued earlier when the interest rates were lower. The borrower inherits both the interest and the monthly payment. Assumable mortgages can save a lot of money for the borrower if the assumed mortgage interest is less than the current market interest on new loans. But before all that, the borrower has to qualify for an assumable mortgage and also has to pay the closing fees and many other charges.
slide 3 of 6
Criteria to be Met By the Buyer
When a buyer opts for an assumable mortgage there are some criteria which he/she is expected to meet. The seller and the financial entity holding the mortgage have to agree upon the fact that the potential buyer has a good credit history. For this to be fulfilled, the buyer has to show financial stability and enough resources to necessitate the fact he would be able to continue to pay the debt on time. Some financial companies set minimum requirements for a buyer who chooses an assumable mortgage. This is to ensure that the debt is cleared without any delays or hassles.
slide 4 of 6
Merits of Assumable Mortgages
Assumable mortgages have a lot of advantages. It saves money for the buyer due to lower interest rates, the approval is obtained much faster, and the seller can recover his equity and can be relieved of his responsibility for the loan. Even the financing companies would benefit if the current owner has some financial difficulties and is not in a position to pay his interests and hence the transfer of the mortgage to a potential buyer who is financially sound will mean payments on time and there will be no foreclosure on the property.
slide 5 of 6
Risks Involved in Assumable Mortgages
Assumable mortgages are not without their risks. The buyer has to go through all the contracts carefully before going in for an assumable mortgage to prevent any further issues with the seller. The seller also has his own risks. For example, even after the mortgage is assumed and the buyer is at default for not paying his dues on time, then the seller would be held responsible for this and will be forced to pay the rest of the money. Hence, it is advisable that the seller relieves his liability and agrees to this in writing mutually when signing the agreement for sale is signed.