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Assuming a Mortgage

Assuming a Mortgage

The current housing market is extremely competitive. Sellers of homes will consider every possible opportunity to ensure that their home stands out amongst the others. Sometimes a seller will use its preferential mortgage rate as a way to attract buyers. This may involve the purchaser choosing to assume the seller’s existing mortgage instead of arranging its own mortgage. This can offer benefits to both parties. It can also be a trap for the unwary. Here is how it works.Assume that you are selling your house. Further assume the rate that you are paying on your mortgage is below the current rate being offered by lenders. You can use your lower rate as a unique selling feature of your home. How can you do this? The answer is simple. Have the purchaser assume or take-over your mortgage.Many buyers will rush to the bank once they have bought the house. They will do this to ensure that they can qualify for a mortgage, thus allowing them to buy the house. If they cannot qualify, the deal is off and the seller will need to find a new buyer. Having the buyer assume the seller’s mortgage can solve this problem.For the seller, there is a major financial incentive to having its mortgage assumed. Many sellers do not realize that they may well face a stiff financial penalty for breaking the mortgage prior to the end of its term. This is always the case if you have a closed mortgage, which many of us do. This penalty is usually calculated by being the greater of the interest rate differential or three months of interest. The bank calculates the interest rate differential. It represents the difference between the interest that the bank is currently earning on the seller’s mortgage versus what it could be earning if it was to loan that same money on the open market. No matter how you slice it, breaking your mortgage early will cost you money. This is something that many sellers do not anticipate.For the buyer, assuming the seller’s mortgage will be an attractive option if the sellers’ mortgage rate is less than the prevailing rates being offered by lenders. The buyer will need to be approved by the seller’s bank in order for the assumption to work. If the buyer is approved, the seller can avoid paying a penalty for breaking the mortgage prior to its expiration. This is a huge advantage for the seller. The seller can use this as a negotiating tool to, perhaps, reduce the sale price of the home. So if the seller is saving money by not having to pay the penalty, this saving can be passed onto the purchaser in the form of a reduced price for the home.Sellers should be aware that there is a serious risk involved if a buyer assumes its mortgage. Because the seller originally contracted with the bank when it arranged the mortgage and because the mortgage will not be paid off when the house is sold, the seller remains liable to the bank if the purchaser (the party who assumed the seller’s mortgage) defaults. If the lender suffers a monetary loss, it could very well sue the seller for the debt notwithstanding that the seller no longer owns the house. The only way for the seller to protect itself is to ask the lender to provide a release of the debt.Assuming a mortgage is a complex procedure and may not always be an option. Buyers and sellers should seek the advice of an experienced real estate lawyer.

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