I am buying a home that has an assumable mortgage loan. Is that a good thing?

Given the challenging real estate market presently in this country compounded by the worldwide economic situation, definitely a yes for the buyer if the interest rate on the existing mortgage is lower than the rate the buyer could obtain on a new mortgage, either because of prevailing market conditions or the buyer’s poor credit history. The ability of a buyer who might not be able to qualify for a loan to simply assume a loan is a huge plus for a person desiring to sell his or her property. However, the biggest hurdle is whether the existing loan secured by a mortgage or a trust deed is fully assumable by a buyer. (A fully assumable loan in the real estate field means that a buyer of the property can actually take over the payments on the loan without any objection by the lender.) Most home loans in this country are not assumable. Meaning, the loan agreement as well as the recorded mortgage or trust deed specifically has an express “due on sales” clause stating that if title of the property for whom the loan is for is transferred out of that person’s name, the loan then becomes due and payable.

Benefits of Assuming a Loan

The major benefit for purchasing a home that has a fully assumable loan is that the buyer does not have to qualify for the loan. Many times buyers have some credit blemishes on their credit rating making it difficult to get a loan. By purchasing real estate that has a full assumable loan, the buyer does not have to worry about being denied a real estate loan. His/her only concern is whether or not the monthly payments can be made.

Another benefit for a buyer in assuming a mortgage is that the s/he does not have to incur costs for the loan. Traditional costs for a loan include escrow fees, document fees, appraisal fees, points and brokerage commissions for the mortgage broker, the latter easily in the range of $7,500 to $10,000 (depending on the loan amount) and added to the amount of the loan. Obviously buying real property with a fully assumable loan is a huge financial saving for a buyer.

Potential Pitfalls of an Assumable Loan

The most obvious pitfall for a buyer who thinks that the loan is assumable (and is not) is that the lender may declare the loan due and payable.  This results in the buyer scrambling to get a loan. Accordingly, it is exceedingly important for the buyer to make sure that the seller's loan is fully assumable -- without any problems.

From the seller’s point of view, it may pay to be cautious about allowing a buyer to assume an existing mortgage on which you are personally liable. Depending on the state and terms of the mortgage, a seller may remain liable on the loan until it is paid off in full.  If the buyer is late on a payment or fails to make a payment, the seller’s credit rating could suffer.

Worse yet, if the assumable loan is not the original loan used in the purchase of the property and the buyer lets the property fall into foreclosure, the seller could very well be responsible for the difference of the amount of the assumed loan and the amount the home was sold in a foreclosure. For example: the initial loan for a property’s purchase was refinanced by the seller for $250,000; the new buyer assumes the refinanced loan, but does not keep up the payments. The lender could foreclose upon the property and sell the property for $210,000, leaving a $40,000 shortfall owed to the lender by the original seller, not the new buyer.

Practically speaking, unless the seller has the finances to cover any missed monthly payments on the assumable loan by the buyer, it is always in the seller’s best interests to have the buyer take out a loan out for the property’s purchase. This avoids the seller's liability for the unpaid mortgage, such as the $40,000 in the above example.

Conclusion

The benefits of an assumable loan for the purchase of real estate by a buyer benefits the buyer more than the seller. It is recommended that in any real estate sale that both the buyer and the seller consult with an experienced real estate attorney before any documents concerning the sale are signed by any party.