What You Should Know About Mortgage Assumptions

Throughout the life of your loan, you may encounter life changes that can impact your living situation. In some cases, a mortgage assumption or transfer of ownership may be a good option.

What is a Mortgage Assumption?

A mortgage assumption allows a homeowner to transfer their existing loan to another person. The person assuming the mortgage then becomes responsible for the remaining balance of the loan while keeping the same interest rate and terms.

In rare cases, a seller may offer a mortgage assumption if their existing loan’s mortgage rate is more attractive than the current loan market – this is called a third-party mortgage assumption. However, it is important to note that most conventional mortgages do not allow for third-party mortgage assumptions (this includes mortgages offered by Freddie Mac).

How Can It Help?

Most mortgage products will allow assumptions in response to major life events, such as divorce or inheriting a property from a deceased relative. Assuming an existing mortgage formalizes changes in the ownership of a property.

For example, if a divorced couple owned property together, and one person is awarded that property in their divorce settlement, a mortgage assumption would allow ownership of the property to change without losing the existing loan terms.

Similarly, if a property is inherited from a deceased relative, the person inheriting the property may benefit from assuming the existing mortgage.

In either scenario, you should speak to your servicer, a housing counselor or an attorney to determine which option works best for your situation.

What is the Process?

The person assuming the mortgage will need to qualify with the lender before assuming the existing loan. This process is similar to qualifying for a new loan. The mortgage qualification process can vary based on your personal situation, but lenders will typically look for the 4 C’s when evaluating a loan application:

• Capacity to Pay Back the Loan. Includes evaluation of income, employment history, savings and monthly debt payments.
• Capital. How much money is readily available, plus investments, properties and other assets.
• Collateral. The value of the property securing the original loan.
• Credit. Credit scores and credit history are used to assess record of paying bills and other debts on time.

Keep in mind there are other options for transferring the ownership of a property following a life change, including succession of interest. In either scenario, you should speak to your servicer, a housing counselor or an attorney to determine your eligibility and which assumption option works best for your situation.