Legal Definitions - assumable mortgage

An assumable mortgage is a type of home loan that can be transferred from the original borrower (the seller) to a new borrower (the buyer) when a property is sold. Instead of the buyer obtaining a completely new mortgage, they take over the seller's existing loan, including its remaining balance, interest rate, and repayment schedule.

This process typically requires the lender's approval, as the new buyer must meet the lender's financial qualifications. A significant benefit for the buyer can be assuming a mortgage with a lower interest rate than what is currently available in the market, potentially leading to substantial savings over the life of the loan. However, sellers must be aware that they might remain financially responsible for the mortgage unless the lender formally releases them from their obligations. Buyers also need to consider that the assumed mortgage might not cover the entire purchase price, necessitating a separate loan or a larger down payment to cover the difference.

Here are a few examples:

• Interest Rate Advantage: Imagine it's 2023, and current mortgage interest rates are averaging 7%. Sarah is selling her house, which she bought in 2019 with an assumable mortgage at a fixed rate of 3.5%. A potential buyer, Ben, is interested in purchasing Sarah's home. Instead of taking out a new mortgage at the current 7% rate, Ben applies to assume Sarah's existing 3.5% mortgage. If approved by the lender, Ben would continue paying the lower 3.5% interest rate on the remaining balance of Sarah's loan, resulting in significant savings on interest payments over the years compared to a new loan.

  This illustrates how an assumable mortgage can be highly attractive to buyers when the existing loan has a significantly lower interest rate than what is currently available in the market.

• Lender Approval and Seller Release: Lisa decides to sell her condominium to Mark. Her mortgage is assumable, and Mark is keen to take it over. Before the transfer can happen, Mark must submit a full application to Lisa's mortgage lender. The lender reviews Mark's credit history, income, and other financial details to ensure he meets their eligibility criteria for the loan. Once Mark is approved, the lender formally transfers the mortgage into his name and, crucially, provides Lisa with a written release, confirming she is no longer financially responsible for the loan. If the lender had not released Lisa, she could potentially still be liable if Mark defaulted on payments.

  This example highlights two critical aspects: the necessity of lender approval for the new buyer and the importance of the seller being formally released from their obligations to avoid future liability.

• Partial Coverage of Purchase Price: The Chen family is selling their family home for $500,000. They have an assumable mortgage with a remaining balance of $300,000. The new buyers, the Rodriguez family, decide to assume this mortgage. After assuming the $300,000 loan, the Rodriguez family still needs to cover the remaining $200,000 of the purchase price. They might do this by making a larger down payment, or they might need to secure a separate, second mortgage (often called a "piggyback" loan) to finance the difference.

  This demonstrates that an assumable mortgage often does not cover the entire purchase price of a property, requiring the buyer to arrange additional financing or provide a substantial down payment to complete the transaction.