Assuming a Loan

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You probably won't be assuming a loan, since it's not common to do so, and it's not even necessarily a good deal even if it's an option. Therefore, I suggest you skip this section and go on to the next one, unless and until you come across a house you like that's being offered with an assumption. There's a lot to know about buying a house, and taking the time to learn things that don't apply to you may only confuse and overwhelm you, and distract you from the things you do need to know.

Skip this section and go to the next section, Owner Financing

 

 

Assuming a Loan

Only in rare cases will you be able to assume a mortgage, which means that you take over the seller's mortgage and just continue making the payments on them. Is it a good deal? It depends. First, let's look at the differences between assuming a mortgage vs. getting your own mortgage.

When assuming an existing mortgage, you'll have to pay some cash to the seller to compensate him/her for the amount of equity that (s)he has in the home. It's kind of like a down payment, since it's cash paid directly from you to the seller, but not exactly. The down payment made when you get you get your own mortgage is done because the lender requires it; they want there to be some equity already in the house in case you don't make your payments right away and they have to repossess it. On the other hand, when you assume the mortgage, you don't always have to satisfy the bank, but you do have to compensate the seller for the amount of equity that (s)he has in the property (i.e., the amount that the seller paid as a down payment, plus the amount of principal payments made towards the loan, plus the amount the property has appreciated since s/he bought it).

This amount you pay to the seller could be a little or a lot, depending on how much the owner put down when (s)he bought the house, how many years (s)he's been making payments, and how much the property has appreciated during that time. If the purchase price is $120,000 and there's $80,000 left on the mortgage, then you'd either have to pay that $40,000 difference in cash (ouch), or get a separate loan for that $40k. On the other hand, if the purchase price is $120k but there's $110k left on the mortgage, then you only have to come up with $10k.

An assumed loan will be paid off faster since you're already X years into it when you start taking over the payments. Another advantage is that when assuming a loan, you also avoid having to pay most of the Closing Costs that you'd have when getting your own mortgage. (Closing Costs are covered later.)

With most assumed loans you still have to pass a credit check, just like if you had taken out a brand-new loan yourself. The old "non-qualifying assumption" loans where they don't do a credit check are obsolete -- the last of these closed in 1989.

What's the catch with all this?

  • First of all, most houses simply aren't sold with assumable mortgages. Usually you'll have to get your own mortgage. Banks have increasingly prohibited their mortgages from being assumed, and even if there's no such prohibition, most sellers don't like to sell this way anyway.

  • Second, even if you can find one, you'll probably have to come up with a lot of cash to pay the owner for his or her equity in the house. If you have a lot of cash lying around you could probably qualify for your own mortgage and wouldn't need to assume one.

  • Third, the interest rate on the mortgage you assume might be higher than the rate you could get on a brand-new mortgage from a bank now.

  • Fourth, while you can insist on a Fixed Rate mortgage if you're getting your own loan, you might be assuming an Adjustable Rate mortgage, which might be a worse deal. You'll have to look at the numbers to know for sure.

Here's the summarized advice:

Tip: Assuming a mortgage is often a good deal when you pay no more than 10-20% of the purchase price in cash, and when the interest rate isn't higher than current interest rates.

If you have to put more money than that into it, then you're tying up that money in the house. It might be better for you to get a different house with a smaller down payment, and invest the extra cash somewhere else, like a socially-responsible mutual fund.

Tip: Get a copy of the loan papers (note) from the seller so you can review the exact conditions of the loan. Also, get an assumption package from the lender, which will tell you what you have to do to assume the loan.


Getting a New Mortgage vs. Assuming a Mortgage

Get a New Mortgage

Assume an Existing Mortgage

Closing Costs

A lot

A little

Time to pay off loan

15-30 years

Less than 15-30 years

Credit Check / Prove ability to pay

Bank will run a credit check on you and see if they think you can afford the mortgage payments based on your income/debts.

Same. Non-qualifying assumptions are obsolete.

Amount of cash you need up front

5-20% for Down Payment, to show the bank that you're responsible with saving money, so they'll give you a loan

Payment to the seller to compensate him/her for the equity (s)he's built up in the house. No telling what the amount will be, depends on how much equity the owner has built. The smaller the amount of cash you have to front, the better the deal.

Interest Rate

Fixed Rate: Whatever the current interest rate is now.
Adjustable Rate: Usually starts out lower than the current rate, then goes up over time.

Fixed Rate: Whatever the interest rate was when the mortgage was originally obtained by the seller (who was then the buyer).
Adjustable Rate: No telling, you'll have to check with the bank. Note that assumable loans are more likely to be Adjustable than Fixed.


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