Assumption of Loan

A provision in a mortgage contract known as an assumption clause enables the seller of a home to transfer the responsibility for paying the current mortgage to the buyer of the property through the transfer of ownership of the property. In other words, the new homeowner is responsible for paying the existing mortgage, and along with that responsibility comes ownership of the property that serves as collateral for the loan. The buyer is normally required to meet certain credit and other conditions; however, the guidelines for assumption clauses can differ depending on the type of loan.

A loan assumption takes place when a buyer of a piece of real estate agrees to take on the existing mortgage loan obligation of the previous owner of the home (who is essentially “selling” both the residence and the loan debt to the new buyer). The lender needs to give their blessing in order to assume a loan.

When a piece of real estate is bought “subject to” the existing mortgage on the property, it is generally believed that the buyer will not be responsible for making payments on the loan. If the purchaser does not make their obligations, the lender will pursue reimbursement from the person who originally borrowed the money. Although the buyer may have very little need to return the loan, only an extremely illogical person could fail to realize that defaulting on a mortgage entails the loss of any equity that was invested in the property as well as the complete impossibility of obtaining a mortgage in the future.

A mortgage that can be assumed gives the buyer of a property the ability to take over payment obligations originally incurred by the seller of the property. There is a possibility that the buyer and the seller will each come out ahead financially as a result of an assumed mortgage. However, everything hinges on whether or not the buyer has the financial wherewithal to accept the assumed mortgage rate, which is frequently lower than the rates currently available on the market. Additionally, the purchaser is able to save money by not having to pay certain settlement charges when they assume an existing mortgage. In most cases, loans issued within the final 20 years of a mortgage are not eligible to be assumed, with the notable exception of loans made by the VA and the FHA.