Selling A House With a Mortgage
Assumable mortgages are loans where the lenders permit the mortgagers to
transfer their existing mortgages to another person, specifically the person who
is buying the house. Selling a home with a transferable or assumable mortgage
can be advantageous to both the seller and the buyer.
Although selling a home with the mortgage intact is rarer today than in the 80s
for instance, there are definitely advantages and disadvantages to the seller.
The reasons that assumable mortgages are not as common as they used to be are
that lenders lost money on many properties so they have tightened up the
requirements for assuming a mortgage. But given that fact, there are still some
assumable mortgages in the market place so we have outlined the pros and cons of
selling a house with the mortgage.
Pros - Reasons to Sell a House with the Mortgage
- The best time to sell a home with a mortgage is when the interest rates in the market are high and the rate on the loan is low. By promoting the mortgage with the house, the seller is able to attract many more potential buyers. Obtaining a mortgage with low interest rates would be highly desirable.
- Avoid closing costs on mortgage. Although many lenders allow their customers to switch their existing mortgage to a new mortgage in the event of buying a new home, there are costs associated with this action. By letting the buyer purchase the house with mortgage, the seller costs may not be as high.
Cons - Reasons Against Selling a House with the Mortgage
Because lenders have tightened their borrowing criteria, they have added many
clauses to mortgage contracts that prevent assumable mortgages or at least make
them unattractive to potential buyers.
- Assumable mortgages were perfect for people with poor credit, no credit and who were self-employed. It was easy to get a home since they assumed the mortgage. But now most lenders require the same credit information on the new person as the original mortgager.
- Lenders specifically stipulate in the contract that the mortgage is not assumable.
- Lenders can now change the terms of the mortgage thereby increasing the interest rate to meet current market conditions. Thus, the mortgage is no longer attractive to the buyer and a disadvantage to the seller.
- When the seller gives up his/her mortgage, it may not be as easy to obtain a new mortgage. For some people, it is better to switch a mortgage than letting it go completely.
- Some, if not all, mortgages now have "due upon sale" clauses.
- In some states and provinces, and depending on the lender, the seller may be liable for any monies lost on the part of the lender. Should the person assuming the mortgage fail to meet his/her obligations and the lender forecloses, the seller may be responsible for the portion of the funds that the lender has not recovered.
- If the existing mortgage owing is greater than the resale value of the house, then it stands to reason that the house would not be sold with the mortgage. No one would assume a loan on a house that is over-mortgaged.
In summary, given today's marketplace and current lender restrictions, it is most likely not in the seller's favor to sell a home with the mortgage.
A relevant article: Selling Your Mortgage With Your House on Bill's Mortgage Page.