Guide to Mortgage Assumptions
If a mortgage assumption was a person, he or she would be the personal injury attorney showing up right after a car accident: Your eyes would meet as you lay there in the street, among shards of glass and twisted metal, and while you might cringe upon catching his gaze, you’d probably also be glad he showed up.
For the buyer, a mortgage assumption can work out well under the right circumstances, but it often is steeped in the seller’s misery or tragedy. For the seller, it can be a good way to get a weight off of one’s shoulders, a two-story weight that has 2.5 bathrooms.
Mortgage assumptions come about when the seller has to get rid of their home somehow and the traditional method of finding a buyer and selling the house isn’t working. It’s an avenue that some sellers can try if they don’t want to go through the pain of surrendering their home to the bank, i.e. foreclosure.
But the caveats are many: Banks aren’t fond of mortgage assumptions, and Fannie Mae and Freddie Mac won’t even allow them. Only VA, FHA and USDA loans allow someone to assume an existing mortgage. Most real estate experts blanch when they hear the two words put together. A few think it’s a relevant way of selling or buying a home.
So, from the get-go, you should assume the odds of buying or selling a house via mortgage assumption are low—but it’s worth learning a little about it because as they used to say on those Saturday morning Schoolhouse Rock cartoons, “Knowledge is power.”
How It Works
The seller agrees to let the buyer take over his or her house payments with the same interest rate that they’ve had since they first bought the house. They are assuming the existing mortgage, hence the name: mortgage assumption. But because the buyer has to fork over that equity to the seller, the answer to your question is: No, you are not buying a house and getting thousands of dollars of equity that you get to keep.
Let’s say that you want to assume someone’s $300,000 mortgage that has $100,000 of equity in it. You’d pay $100,000 to the seller and then assume the mortgage. Most homebuyers don’t have that kind of cash lying around, and those who do, probably aren’t looking for a way to buy a home in a nontraditional method.
Meanwhile, if the seller had that sort of equity in their house and were having trouble making payments to the bank, they’d likely come up with a loan modification plan with their mortgage company and save their house, or at least buy time until their finances were sorted out.
Is a Mortgage Assumption Right for You?
Who Might Want to Participate
Here are a couple situations where mortgage assumption might work:
- An aging parent lives in a house with little equity, plans to move into assisted living and wants to help a son or daughter look for a house.
- A potential homebuyer happens to know someone facing a foreclosure. It could be a win-win situation for both. For instance, if your cousin has only about $10,000 equity in their $300,000 home, it may look more appealing to both of you.
“About the only time it would make sense is if the value of the home was relatively close to the value of the mortgage, and the seller wasn’t expecting much, if any, equity from the sale and could arrange the sale without incurring real estate agent fees,” says Don Davis, a mortgage banker and broker in Marysville, Wash.
It’s probably most likely and ideal for someone like David Covey, a 26-year-old Winter Haven, Fla. electrician, who recently divorced after being married for four-and-a-half years.
“I volunteered to take over the house payments, since I had the higher income,” says Covey, whose mortgage assumption wasn’t considered a done deal, just because his name had also been on the deed.
After all, his wife had been an office manager at a supply company. Her income was contributing plenty to their mortgage and lifestyle, and so the bank wasn’t just about to agree to let Covey’s wife off the hook and keep Covey on the deed.
“There are a bunch of hoops to jump through,” says Covey, who first had to agree to a credit check. His bank verified his employment and income. Covey had to agree to give his ex-wife some of their equity in their house before her name could be removed from the deed, and he needed to have the paperwork to prove that he had paid his ex. By the time everything was over and approved, the process had taken three months.
Consult an Expert
Sure, there’s a lot of red tape and reasons not to do a mortgage assumption, but if you are a seller having trouble making payments and you think you might be able to do a mortgage assumption, it can’t hurt—provided you find someone reputable—to talk to a housing consultant or a real estate agent to see if your situation is right for a mortgage assumption.
"They’re not presently widely used as a vehicle to reduce foreclosures," says Sylvia Alvarez, executive director of Housing & Education Alliance, a HUD-certified housing counseling agency in Tampa, Fla. "But we feel we will see more in the future. These troubling times are forcing investors and servicers to explore and accept proposals from homeowners that a year ago they would not have even considered."
Geoff Williams is a freelance journalist and the author of C.C. Pyle’s Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America.