Definition
Assumption of mortgage refers to taking on the obligations of a mortgagor toward a mortgagee, typically as part of the purchase price of real estate. When a purchaser assumes the mortgage, they become personally liable for the original borrower’s debt. However, the original borrower, or seller, remains responsible unless a novation, an agreement released by the lender, is made. Often, lenders require their approval for such a transaction, and may charge points or increase the interest rate on the loan.
Examples
- Home Purchase Assumption: John buys a house from Mary and agrees to take over Mary’s existing mortgage. John becomes liable for the remaining debt and continues to make the mortgage payments as per the original terms.
- Conditional Assumption: Linda buys an apartment and wishes to assume the existing mortgage, but the lender requires her to demonstrate financial stability and charges a fee to approve the transaction.
- Novation Case: Mark sells his property to Susan under a mortgage assumption agreement. The lender agrees to release Mark from the debt via a novation, making Susan the sole party responsible for the mortgage.
Frequently Asked Questions (FAQs)
Q1: What happens if the lender does not approve the mortgage assumption?
- In many cases, if the lender does not approve the assumption, the original borrower remains liable for the mortgage, and the purchaser may need to seek alternative financing.
Q2: What is the difference between assuming a mortgage and taking subject to a mortgage?
- When a mortgage is assumed, the buyer takes on personal liability for the debt. Taking subject to a mortgage means the buyer purchases the property without becoming personally liable for the mortgage payments, even though the property is still collateral for the loan.
Q3: Can all mortgages be assumed?
- No, not all mortgages are assumable. Assumability needs to be a term included in the mortgage contract, and lender approval is typically required.
Q4: Is any credit check required for assuming a mortgage?
- Yes, lenders generally perform a credit check on the buyer to ensure they are financially capable of taking on the mortgage obligations.
Q5: What fees are involved in assuming a mortgage?
- Fees may include a mortgage assumption fee, potential charges for credit checks, and sometimes an increase in the interest rate as stipulated by the lender.
Related Terms
- Assumable Loan: A mortgage loan that can be transferred from the seller to the buyer, subject to lender approval.
- Novation: A legal agreement where the lender replaces one party to the mortgage with another, releasing the original borrower from obligation.
- Subject to the Mortgage: A property purchase where the buyer acquires ownership without taking on personal liability for the existing mortgage.
- Personal Liability: The responsibility of the individual taking on the mortgage to fulfill the debt repayment requirements.
Online References
- Investopedia - Mortgage Assumption
- Nolo - Assuming a Mortgage When Selling or Buying a Home
- HUD - Assumable Mortgages
Suggested Books for Further Studies
- Real Estate Principles: A Value Approach by David Ling and Wayne Archer
- Mortgage Lending Principles & Practices by Kenneth W. Hurst
- The Real Estate Wholesaling Bible: The Fastest, Easiest Way to Get Started in Real Estate by Than Merrill
- Fundamentals of Real Estate Appraisal by William L. Ventolo
- Investing in Real Estate by Gary W. Eldred
Fundamentals of Assumption of Mortgage: Real Estate Basics Quiz
### When a mortgage is assumed, who is personally liable for the debt?
- [ ] The original borrower
- [x] The purchaser of the property
- [ ] The mortgage broker
- [ ] None of the above
> **Explanation:** When a mortgage is assumed, the purchaser of the property becomes personally liable for the debt.
### What must occur for the original borrower to be relieved of mortgage obligations?
- [ ] The new borrower makes the first payment
- [ ] The property value increases
- [x] A novation agreed by the lender
- [ ] A third-party guarantee
> **Explanation:** The original borrower is relieved of mortgage obligations through a novation, which requires the lender's agreement.
### Do all lenders allow mortgage assumption?
- [ ] Yes, all lenders allow it.
- [ ] Only government lenders allow it.
- [x] No, only some lenders allow it with approval.
- [ ] None of the lenders allow it.
> **Explanation:** Not all lenders allow mortgage assumption; lender approval is typically required.
### In a "subject to the mortgage" purchase, who is liable for the mortgage payments?
- [x] The original borrower
- [ ] The purchaser
- [ ] Both the original borrower and the purchaser
- [ ] The mortgage lender
> **Explanation:** In a "subject to the mortgage" purchase, the original borrower remains liable for the mortgage payments.
### Can a lender increase the interest rate during mortgage assumption?
- [x] Yes, it is possible if stipulated in the contract.
- [ ] No, the interest rate remains fixed.
- [ ] Only if the buyer has bad credit.
- [ ] Only if the property value decreases.
> **Explanation:** A lender can increase the interest rate during mortgage assumption if this is permitted by the original mortgage contract.
### What might a lender require from a buyer during mortgage assumption?
- [ ] Proof of rental history
- [x] Financial stability proof
- [ ] Insurance policies
- [ ] Renovation plans
> **Explanation:** Lenders usually require proof of financial stability from the buyer during mortgage assumption.
### What is an assumable loan?
- [ ] A loan that cannot be transferred
- [x] A loan that can be transferred from seller to buyer
- [ ] A personal loan
- [ ] An interest-free loan
> **Explanation:** An assumable loan is a mortgage that can be transferred from the seller to the buyer, subject to lender approval.
### Who approves the assumption of a mortgage?
- [ ] Real estate agents
- [x] The lender
- [ ] The local government
- [ ] The original borrower
> **Explanation:** The lender approves the assumption of a mortgage.
### What role do points play in mortgage assumption?
- [ ] They reduce the property’s value.
- [ ] They are a form of mortgage insurance.
- [x] They are fees charged by lenders.
- [ ] They lower the mortgage interest rate.
> **Explanation:** Points are fees charged by lenders during the mortgage assumption process.
### What term describes legal release of original borrower through lender agreement?
- [ ] Escrow
- [x] Novation
- [ ] Assignment
- [ ] Refinance
> **Explanation:** Novation is the term used to describe the legal release of the original borrower through an agreement with the lender.
Thank you for engaging with our comprehensive guide to mortgage assumption and tackling our quiz. Keep up the great work in enhancing your real estate knowledge!
