Guide to Mortgage Assumptions

By Geoff Williams, FrontDoor.com | Published: 12/22/2008

For the buyer, a mortgage assumption can work out well under the right circumstances, but it often is steeped in the seller's misery or tragedy. For the seller, it can be a good way to get a weight off of one's shoulders, a two-story weight that has 2.5 bathrooms.

Mortgage assumptions come about when the seller has to get rid of their home somehow and the traditional method of finding a buyer and selling the house isn't working. It's an avenue that some sellers can try if they don't want to go through the pain of surrendering their home to the bank, i.e. foreclosure.

But the caveats are many: Banks aren't fond of mortgage assumptions, and Fannie Mae and Freddie Mac won't even allow them. Only VA, FHA and USDA loans allow someone to assume an existing mortgage. Most real estate experts blanch when they hear the two words put together. A few think it's a relevant way of selling or buying a home.

So, from the get-go, you should assume the odds of buying or selling a house via mortgage assumption are low -- but it's worth learning a little about it because as they used to say on those Saturday morning Schoolhouse Rock cartoons, "Knowledge is power."

HOW IT WORKS

The seller agrees to let the buyer take over his or her house payments with the same interest rate that they've had since they first bought the house. They are assuming the existing mortgage, hence the name: mortgage assumption. But because the buyer has to fork over that equity to the seller, the answer to your question is: No, you are not buying a house and getting thousands of dollars of equity that you get to keep.

Let's say that you want to assume someone's $300,000 mortgage that has $100,000 of equity in it. You'd pay $100,000 to the seller and then assume the mortgage. Most homebuyers don't have that kind of cash lying around, and those who do, probably aren't looking for a way to buy a home in a nontraditional method.

Meanwhile, if the seller had that sort of equity in their house and were having trouble making payments to the bank, they'd likely come up with a loan modification plan with their mortgage company and save their house, or at least buy time until their finances were sorted out.

NEXT: Is a Mortgage Assumption Right for You? >>

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