An assumable mortgage is a loan that enables a buyer to take over a seller’s mortgage when purchasing a home. Specifically, it is a mortgage that can be sold to a purchaser who promises to “assume” the mortgage debt. When a buyer assumes responsibility for a seller’s existing mortgage, the buyer assumes all the obligations under the mortgage with no change in terms, just as if the original loan had been made to her. The mortgagee can, in turn, enforce the promise made by the purchaser in assuming the mortgage.
In order to assume a mortgage, the purchaser must qualify for the loan and pay closing fees, including the appraisal cost and title insurance. Approval by the original lender is also required. Thus, a purchaser’s promise does not relieve the mortgagor of the duty to pay the mortgagee unless the lender consents to this change in the contract. Regardless of the lender’s approval, however, the mortgagor has the right to pay the debt and bring suit against the assuming purchaser for reimbursement.
Assumable mortgages are one way in which sellers make their property more attractive to potential purchasers. If interest rates have risen since the seller took out the original mortgage, the buyer benefits considerably from assuming the mortgage. This is because the cost of borrowing increases if rates rise. As such, if the buyer can take over the already-existing mortgage, the buyer will avoid having to pay the higher current market rate. Note, however, that the full cost of the assumable mortgage may not cover the full cost of the home. In such cases, the buyer may be required to either place a down payment on the difference or obtain additional financing.
Sellers should be aware of one unique risk associated with assumable mortgages. The lender can hold the seller liable for the loan itself even after the assumption occurs. Therefore, if the purchaser defaults on the mortgage and the lender forecloses, but the property sells for less than the loan’s balance, the lender can sue the seller for the difference. Sellers can avoid this risk by specifically releasing themselves from liability in writing at the time the assumption takes place.