Assuming a Mortgage vs. Taking the Property Subject to a Mortgage

Unless a buyer has the cash to pay for a real estate purchase, he needs to secure financing to purchase the property. Although the phrases “taking the property subject to a mortgage” and “assuming a mortgage” both refer to financing a real estate purchase, the first is in regards to a buyer’s contingency. The second phrase might or might not refer to a contingency.

When a real estate buyer makes an offer to purchase real estate, she typically prepares a purchase contract, specifying the offer. The purchase contract normally includes the price the buyer is offering to pay, how the buyer intends to fund the purchase, and any buyer’s contingencies. A contingency is a provision included in the purchase contract or offer that must occur before the purchase contract is binding on the buyer. The buyer does not have to complete the contract if the contingency fails to happen.

Two common ways of financing property include a deed of trust and a mortgage. A deed of trust is a three-party system involving the borrower, lender and a trustee who works in the interest of the lender. The mortgage system involves a mortgage, a lien held by the lender against the property. The mortgage lien enables the lender to foreclose on the property if the borrower defaults on the loan.

When a purchase contract states “Taking the property subject to a mortgage,” it means the buyer’s offer is contingent on the buyer obtaining a mortgage loan on the property. If the buyer is unable to secure a mortgage, he is not obligated to complete the purchase. If a buyer presents the seller with a loan approval letter or similar document, it does not mean the buyer will be able to secure a loan.

For example, most real estate loans are contingent upon the property being appraised for a specific amount. If the appraisal isn't high enough to support the loan, the lender won’t lend on the property. Unless the buyer is willing to contribute more cash or the seller is willing to lower the price, there won’t be funding for the purchase.

Assuming a mortgage means that the buyer is assuming the seller’s mortgage loan. To purchase the property, the buyer might pay the seller cash, and then assume the responsibility of the seller’s loan against the property. In some cases, the lender can still hold the seller responsible if the new buyer defaults on the assumable loan.

Assumable mortgages were more common during the latter half of the 20th century than in the beginning of the 21st century. Assumable mortgages were attractive to buyers when the seller's mortgage carried a lower interest rate than the current loan rate available to the buyer.

Not all loans are assumable. A buyer might make loan assumption a contingency in a purchase offer.