Guidelines for Assuming a Mortgage

Investopedia defines ‘assuming a mortgage’as a financial arrangement in which the outstanding mortgage and its terms are transferred from its current owner to a new buyer. This will avoid the buyer from having to buy his or her own mortgage. According to analysts, the tendency towards assuming mortgages seems to rise when the interest rates increase. Thus, by assuming a mortgage, a buyer can continue with the interest rate offered to the mortgage at a previous occasion and dodge the higher interest rates that may prevail at the time of assuming the mortgage.

However, assuming a mortgage is not that easy and it requires strict guidelines to follow. While not all mortgages are eligible for this arrangement, even if it is eligible, not all buyers would be able to qualify.

For instance, as described by Investopedia, if the selling price of the house is considerably higher than the outstanding mortgage, the buyer may have to pay a sizable down payment on assuming the mortgage or else may have to obtain a new mortgage all together.

From the part of the buyer, at the time of assuming a mortgage, he or she may have to show documentation to prove his or her credit worthiness. For instance, the buyer may have to demonstrate a reasonable level of credit worthiness, usually a credit score of 580 or higher, in order to be eligible for assuming a mortgage. He or she may also have to demonstrate evidence regarding a steady flow of income, above the required mortgage payment, in order to qualify. In this instance, buyer can produce job contract, pay slips…etc as evidence. Furthermore, a buyer has to demonstrate that he or she has not been listed as bankrupt or has not undergone a foreclosure, at least within the past 2 to 3 years.

Once the lending institution assesses the eligibility of the property and the buyer for assuming a mortgage and is satisfied with the submissions, the transfer can take place. The transfer would be recorded at the lending agency as well as in the county books. In most cases, the buyer has to pay a processing fee to the lending agency.

After making the transaction, the seller of the property or the previous owner of the property, would be released from the contract. This would mean that in the case of a default, the previous owner of the mortgage would not be liable for repayment as was practiced prior to 1989 where the original mortgage owner would be held liable until its new owner repays the entire mortgage, in the event of a default.  This may be because prior to 1989, the lending agencies did not subject the buyers to any qualification assessment process before allowing them to assume a mortgage. Therefore, they had little control over who would assume the mortgage and whether the person has the ability to repay the loan in full.

However, depending on the type of mortgage and the lending institution, there may be different requirements when transferring a mortgage to a new buyer. Thus, it is always better to discuss the possibility of allowing a buyer to assume a mortgage with the lending institution well before deciding to sell the house or it may lead to conflicting situations.