Buying A House With a Mortgage
For many people, the only hope to purchasing a home may be through assuming someone else's mortgage. The thought of an easy transferable mortgage would be highly advantageous to someone with poor credit, a bankruptcy, no credit history or even immigrants who are new to the country. But for all the positives in assuming a mortgage, there are several reasons why it may not be as easy as it appears.
For someone with favorable credit, there is no reason to assume someone else's mortgage. The best deals are given to those with the best credit.
- Lenders have realized that they lost money when they allowed assumable mortgages. Specifically, they were not able legally to increase the interest rate to meet market rates thereby, keeping the mortgage on the books at the lower rate. In order to gain the extra percentage, they have written into the contract that the mortgage is assumable but the terms may be modified. For a potential buyer looking to hold a cheap mortgage, this would no longer be attractive.
- In the past, when mortgages were assumed, the new owners were able to circumvent certain costs such as inspection fees, appraisal costs and mortgage broker fees. But today, lenders want to be assured that the property is still up to code and now require the same criteria as a new mortgage.
- In some states and provinces, depending on the lender, when assuming a mortgage, the buyer is responsible to furnish the difference between the agreed purchase price and the existing mortgage in cash. So if they are not able to provide the difference from their own savings, they are not able to assume the mortgage. There are however, some lenders who will permit the buyer to make a smaller down payment and take out a second mortgage while the buyer assumes the first or existing mortgage.
To illustrate - if the agreed selling price is $120,000 and the existing
mortgage is $80,000, then the buyer needs $40,000 in cash to complete the sale.
But if he/she only has $20,000, there may be restrictions on him/her looking for
a second mortgage to cover the remaining $20,000. On the other hand, if he/she
bought the house without the existing mortgage, the lender may offer to finance
the full $100,000 since he/she has a substantial down payment.
Lastly be wary of sellers offering assumable mortgages. The seller cannot decide
to make his mortgage assumable. If you are buying a home and the seller agrees
to let you assume his mortgage to facilitate the purchase, before entering into
any agreements, request a copy of his mortgage so that you can determine for
yourself whether this is a legitimate offer.