How to Assume a Mortgage

A buyer who assumes a mortgage purchases a home and takes over the seller's mortgage debt. The buyer typically pays a cash deposit representing the difference between the offer price and the remaining balance on the seller's mortgage. The seller transfers his mortgage obligation to the buyer, who makes all future payments. Historically, a buyer could assume a mortgage by private contract with the seller. Today, most lenders block such mortgage-assumption practices to ensure the lender has a say in the transaction.

Assuming a loan means literally stepping into the seller's shoes. The buyer takes on the interest rate, repayment terms and other conditions of the loan. Generally, the buyer will benefit if the interest rate is lower than the rate he could achieve in the market. However, most conventional mortgages are not assumable. Lenders do not want an inferior borrower replacing a creditworthy borrower, as this increases the risk of default. Read the mortgage conditions before attempting a mortgage assumption. Rarely can you proceed with an assumption without a lender's consent.

Government-backed loans, such as those from the Federal Housing Administration and Department of Veterans Affairs, are inherently assumable provided the buyer meets certain qualifications. However, FHA and VA loans may still contain a due-on-sale clause. A due-on-sale provision lets the lender call due the full amount of the loan if the seller attempts to sell the property to someone else. If the seller cannot pay, the bank can foreclose. In almost all cases, the due-on-sale clause means that the buyer cannot assume the seller's loan unless the bank says he can, irrespective of whether the loan is conventional, FHA or VA.

Many banks have a mortgage assumption package that spells out the process the parties must follow to transfer the loan through assumption. Procedures may vary, but the buyer invariably has to qualify for the loan. Government-backed loans typically have more lenient approval criteria than conventional loans. For example, an FHA lender is more likely to overlook blemishes on the buyer's credit record. However, the mortgage lender has absolute power to approve or deny the mortgage assumption.

If the bank agrees to the assumption, it will ask both the buyer and the seller to sign paperwork transferring the mortgage liability to the buyer. At this point, the seller should check that he is released from liability to the loan. Without a release, the seller may still be responsible for the loan if the buyer later defaults. Late payments and loan default appear on the seller's credit report and frustrate attempts to get a new mortgage loan if a release of liability is not issued.