Assumable Mortgage Definition
An assumable mortgage is a mortgage that may be transferred without changing the terms of the original mortgage.
A third party takes over remaining payments on the mortgage and becomes legally responsible for the mortgage terms.
The original mortgage must permit assumption, and in most cases, the bank must approve the assumption as well as the person assuming the mortgage. The buyer will need to show they have sufficient assets and credit worthiness for the bank to approve them. The buyer who is assuming the mortgage may have to pay a fee to the bank for settlement of the transaction.
Although the assumable mortgage is often advantageous to both parties, there is still a risk for the seller of the home. Even after a buyer has assumed a seller’s mortgage, the lender can still hold the seller personally liable for the mortgage if the buyer were to default on the loan. For example, the bank may foreclose on the property and if the selling price of the home is lower than the remaining balance on the mortgage, the initial seller of the assumable mortgage can be sued for the difference. However, CMHC has adopted a new policy that if an assumption takes place and the mortgage payments are kept current for 12 consecutive months, the seller would no longer be liable in the event of a default.
A Real Example
An assumable mortgage works much like a sublease in rental property. In a sublease, someone under a lease will in turn lease out the property to a third person, provided they have the approval of the landlord.
In an assumable mortgage, the owner of property sells the property to a third individual. But rather than requiring the buyer to obtain a new mortgage, the buyer will assume the mortgage of the seller.
For instance, a seller has a home worth $225,000 with an assumable mortgage balance of $200,000. A buyer has $25,000 in cash, but believes the seller has good terms on the mortgage. Instead of the buyer obtaining his own mortgage, he pays $25,000 directly to the seller and assumes the mortgage of $200,000, making payments to the bank as the seller had. The buyer now owns the property, and the bank now seeks repayment of the mortgage from the buyer.
Of of the biggest advantages in assuming a mortgage is getting a lower rate than what might be currently available on the market!
Advantages of an Assumable Mortgage
There are several advantages to an assumable mortgage. Banks often approve the assumable mortgage more quickly than a new loan and settlement charges may be lower. In addition, if interest rates have risen, the mortgage terms of the seller may be more attractive than a new loan. For example, if the seller’s interest rate on the mortgage is 5% but the prevailing interest rates are 7%, a buyer may wish to keep the original mortgage than obtaining a new mortgage.
Considerations when Assuming a Mortgage
First and foremost, the seller needs to review the original mortgage document to ensure that it is assumable. The seller should also talk to the lender prior to marketing the property, to discover the qualifications they will be looking for in a buyer.
The buyer should ensure that the seller’s mortgage is assumable, and that the lender will accept them as a new buyer. If the mortgage is not assumable, or the parties to not get bank approval for the buyer, the lender may have a right to declare the mortgage fully due and payable, even though payments have been made timely.
If you are interested in learning more about assumable mortgages and what they mean for you, please feel free to contact us today!