Examples
Example 1:
Abel owes a 30-year mortgage loan of $250,000 against his house. Baker wants to buy the house and keep the same mortgage. Baker pays $50,000 cash for the equity and assumes the mortgage. As a result, Baker becomes liable for the debt, but Abel remains liable also unless the lender releases Abel from the obligation.
Example 2:
Charley has a 15-year mortgage loan with an outstanding balance of $180,000. Dana decides to purchase Charley’s property and agrees to take on the existing mortgage. Dana assumes the remaining payments, and Charley is still liable until the lender officially releases him from the debt.
Frequently Asked Questions (FAQs)
What is an assumption of mortgage?
An assumption of mortgage is when a home buyer takes over the existing mortgage from the seller, including becoming liable for the remaining loan balance.
What are the benefits of an assumption of mortgage?
The benefits can include potentially lower interest rates (if the original loan had a better rate compared to current market rates), reduced closing costs, and avoiding the need to qualify for a new loan.
What is required from the lender for an assumption of mortgage to take place?
The lender must approve the assumption, ensuring the buyer can support the mortgage; otherwise, the seller may remain liable for the debt.
Can any mortgage be assumed?
Not all mortgages are assumable. FHA and VA loans commonly offer assumable mortgages, whereas many conventional loans do not without lender approval.
How does an assumption of mortgage compare to subject to mortgage?
In an assumption of mortgage, the buyer takes on the liability of the debt, while in a subject to mortgage, the buyer purchases property subject to the existing mortgage without taking on the actual debt responsibility.
What is novation in mortgage assumptions?
Novation in a mortgage assumption involves the lender agreeing to remove the seller from any liability, fully transferring the mortgage to the buyer.
Novation
A legal process where the original borrowers’ liability is discharged, and a new contract is formed between the new borrower and the lender.
Equity
The value of an owner’s interest in a property, calculated as the difference between the property’s market value and the outstanding balance of any mortgages or liens.
Subject to Mortgage
A type of real estate transaction where the buyer takes over payments but does not officially assume the debt, leaving the original borrower (seller) liable.
Mortgage Transfer
The process of transferring an existing mortgage to another party, either through assumption or alternative legal contracts.
Lien
A legal claim on a property that must be paid off when the property is sold. Liens can be held by lenders, municipalities, or other entities.
Online Resources
References
- “The Legal Environment of Real Estate.” Essentials of Real Estate Law, 3rd Edition.
- “Real Estate Finance and Investments.” Essentials of Real Estate, 16th Edition.
- “Principles of Real Estate Practice.” Real Estate Education.
Suggested Books for Further Studies
- “A Practical Guide to Risk Management,” by Thomas S. Coleman.
- “The Book on Real Estate Investing,” by Brandon Turner.
- “Real Estate Principles: A Value Approach,” by David C. Ling and Wayne R. Archer.
Real Estate Basics: Assumption of Mortgage Fundamentals Quiz
### What does an assumption of mortgage entail?
- [x] The buyer taking over the seller's existing mortgage loan.
- [ ] The creation of a new mortgage for the buyer.
- [ ] The immediate release of the seller from the debt.
- [ ] Only the property's title transfer without any mortgage implications.
> **Explanation:** An assumption of mortgage involves the buyer taking over the seller's existing mortgage, continuing without starting a new loan process.
### What is a key advantage of assuming a mortgage?
- [ ] Higher interest rates than those available currently.
- [x] Potentially lower interest rates than current market rates.
- [ ] Increased closing costs.
- [ ] Extensive appraisal requirements.
> **Explanation:** One key benefit of assuming an existing mortgage is potentially benefiting from lower interest rates than those currently offered in the market.
### Which types of loans are typically assumable?
- [ ] Conventional loans without lender approval
- [x] FHA and VA loans
- [ ] Personal lines of credit
- [ ] Unsecured loans
> **Explanation:** FHA and VA loans are the most common types of loans that are assumable, though some conventional loans may be assumable with lender approval.
### In what scenario does the original borrower remain liable after a mortgage assumption?
- [x] When the lender does not agree to release the seller from liability.
- [ ] When the buyer also takes a second mortgage.
- [ ] When the property's equity changes hands.
- [ ] Never; the buyer always assumes full liability.
> **Explanation:** The original borrower remains liable after a mortgage assumption if the lender does not release them from liability, which often requires a process of novation.
### What key approval is needed for a mortgage assumption?
- [x] Lender approval
- [ ] Real estate agent approval
- [ ] Inspector approval
- [ ] Local government approval
> **Explanation:** The lender's approval is crucial for a mortgage assumption, ensuring that the new borrower is capable of fulfilling the mortgage obligations.
### What happens to the original borrower after the mortgage assumption without novation?
- [ ] They are fully relieved of their debt obligations.
- [x] They remain liable for the mortgage until explicitly released.
- [ ] Their credit score improves immediately.
- [ ] They retain partial ownership of the property.
> **Explanation:** Without novation, the original borrower remains liable for the mortgage, making it critical to obtain an official release from the lender.
### Which best describes 'equity' in real estate?
- [x] The difference between the market value of a property and the mortgage balance.
- [ ] The outstanding debt on a property.
- [ ] The initial down payment on a mortgage.
- [ ] Monthly mortgage payments.
> **Explanation:** Equity refers to the owner's interest in a property, which is calculated as the difference between the property's market value and any outstanding mortgage balance.
### What is the difference between 'assumption of mortgage' and 'subject to mortgage'?
- [x] Assumption involves taking on the mortgage liability, 'subject to' means buying without assuming liability.
- [ ] Both terms mean the same.
- [ ] The former involves government-backed loans only, while the latter can be any loan.
- [ ] 'Assumption' requires no lender intervention, while 'subject to' does.
> **Explanation:** In an assumption of mortgage, the buyer becomes liable for the mortgage, whereas in a 'subject to' purchase, the buyer acquires the property without assuming the original loan liability.
### What can make a mortgage assumption attractive to buyers?
- [ ] Inflated property prices.
- [ ] The necessity to initiate a new credit line.
- [ ] Balloon payments attached to new loans.
- [x] Lower interest rates from the original mortgage and reduced closing costs.
> **Explanation:** Assuming an existing mortgage can be attractive due to generally lower interest rates on older loans and potentially reduced closing costs compared to a new mortgage.
### What does 'novation' achieve in a mortgage assumption?
- [ ] Transfer of property ownership only.
- [ ] Debt obligation transfer without lender notification.
- [ ] Change in property zoning.
- [x] Complete discharge of the seller's liability and formation of a new contract.
> **Explanation:** Novation in a mortgage assumption discharges the original borrower's liability and establishes a new contract directly between the lender and the buyer.
