Legal Definitions - assumption fee

An assumption fee is a charge collected by a mortgage lender when a new borrower takes over, or "assumes," an existing mortgage loan from the original borrower. This fee covers the administrative costs incurred by the lender to process the necessary paperwork, update their records, and evaluate the new borrower's financial qualifications to ensure they can meet the loan's obligations.

• Scenario: Sarah wants to sell her house to her daughter, Emily. Sarah has a mortgage with a very favorable interest rate that Emily would like to keep. The lender agrees to allow Emily to assume Sarah's existing mortgage.

  Explanation: In this situation, the lender will charge Emily an assumption fee. This fee compensates the lender for the work involved in reviewing Emily's creditworthiness, updating the loan documents to reflect Emily as the new responsible party, and transferring the mortgage account from Sarah's name to Emily's.

• Scenario: Mark is selling his home, and his mortgage has a clause allowing it to be assumed by a qualified buyer. A potential buyer, David, is interested in assuming Mark's mortgage because its interest rate is significantly lower than current market rates.

  Explanation: When David proceeds with assuming Mark's mortgage, the original lender will assess an assumption fee. This charge covers the administrative effort for the lender to process David's application, verify his financial standing, and formally transfer the legal obligation of the mortgage from Mark to David, ensuring all records are correctly updated.

• Scenario: John and Lisa are divorcing. As part of their settlement, Lisa will keep the marital home, and John will be removed from the mortgage obligation. Lisa will assume sole responsibility for the existing mortgage.

  Explanation: Even though Lisa was already a party to the original mortgage, the lender will likely charge an assumption fee to process the legal and administrative changes required to remove John from the loan and formally recognize Lisa as the sole borrower. This fee covers the costs of updating the loan agreement and internal records to reflect the new single-borrower status.