Contrary to popular belief, some mortgage loans are assumable. Instead of taking out a new mortgage, a property buyer assumes the seller’s mortgage taking over his principal balance, repayment period and most importantly the interest rate (See Reference 1). The process can be a bit challenging. It requires patience and in some instances, more ready cash, but if it works it can be a win-win for both the buyer and seller.
Discover What It Takes
Not all mortgages are assumable, so the first step is to find out from your lender whether it is possible to transfer your mortgage. Lenders ordinarily restrict transfer and most loans have a clause indicating the entire mortgage debt becomes due when you sell the property. Conversely, FHA-insured and VA mortgages are generally assumable, although the lender has to approve the mortgage transfer. The buyer must meets lender eligibility requirements including a good credit score and a high income-to- debt ratio, just as if he was applying for a new mortgage loan.
Does It Make Sense?
It is important to decide if your assumable mortgage is a better option than taking on a new mortgage. There are several factors a buyer will consider in making a decision to assume your mortgage. The first hurdle is interest rate -- is yours lower than what's being offered currently? The next step is deciding whether it's cheaper to assume or just get a new loan. And the final consideration is the amount of cash he will need to settle the difference between the purchase price and the mortgage balance. For example, if the property value is $150,000 and you have an outstanding mortgage of $140,000, the buyer will take over the debt and must make up the $10,000 difference in cash.
Find a Buyer
If your lender permits mortgage transfer and an assessment of the deal reveals that assumption of your mortgage would be beneficial to a buyer, market your property highlighting the key benefits. For example, you could advertise that you are selling a property with an assumable mortgage featuring a low interest rate and a minimal cash deposit. When you find an interested buyer, disclose all the mortgage details as well as your lender’s eligibility requirements. Have the buyer find out whether he can get 100 percent financing for the deal, failing which you can negotiate the payment of the cash difference.
Finalize the Transfer
Aside from the usual closing documents including sale agreement, mortgage deed and identification, there are other documents required for the mortgage assumption transaction. Your lender will issue you with a mortgage assumption package indicating which paperwork is needed from you and the buyer. The documents include a mortgage assumption agreement and the buyer’s loan application form with supporting files showing his income, address and other contact details. The package may also contain an addendum securing the release of the seller from all liability when the buyer proves creditworthy. If the lender does not include the release of liability, you can inquire into how and when you can get one.
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