An assumption of mortgage occurs when a homeowner sells a mortgaged property to a prospective buyer, transferring liability for the existing mortgage to the new owner. Mortgage assumption becomes necessary when a buyer is unwilling or unable to incur the expense and inconvenience of applying for a new home loan.
Typically the buyer will pay the homeowner a sum of money covering any equity in the property and assume responsibility for servicing mortgage payments. The seller can use the sum paid by the buyer as a deposit against a mortgage on a new property. This can reduce the need for extensive credit checks for the buyer and so mortgage assumption can be necessary in cases where a person with a poor credit history is looking to buy a mortgaged property.
Mortgage assumptions are complicated, however, by the fact that although the buyer assumes liability for the mortgage, the seller also remains liable until such time as the original mortgage lender confirms that they are free of all liability for the loan. This protects lenders to a certain extent from mortgages being assumed by unreliable buyers.
There have been moves to restrict mortgage assumptions in recent years with due-on-sale clauses becoming an integral part of many mortgage agreements. In other words, to stop liability for a mortgage being assumed by a buyer, the lender can demand that the balance of the original loan is repaid in full when the sale goes through if they have not given their express written consent to transfer the mortgage.
Because of these restrictions on mortgage assumption, property transfers involving mortgaged properties are sometimes referred to as sales which are subject to the existing loan.
Assuming a mortgage loan is sometimes necessary when interest rates have increased dramatically since the point at which the mortgage was agreed. A buyer might be able to afford the terms of the existing mortgage, but be unable to finance the interest rate on a new loan. It can also be necessary if a buyer can not afford the hefty fees associated with arranging a new loan, which traditionally is more expensive than assuming a pre-existing mortgage.
Mortgage assumption can be a risky business for all three parties involved – the buyer, seller and the original lender, but it can be a necessary step for some first-time buyers who may not have a solid credit history or the capital in hand to arrange a new loan.