Questions About Mortgage Assumptions
interest rates lurking on the horizon, some consumers with
homes they plan to sell within the next 5 years or so are
asking questions about whether or not they can transfer
their low-rate mortgage to a purchaser of their house. These
are some of the common ones.
Q: What is an
It is a transfer of
responsibility for repaying a mortgage from the seller of
the house that secures the mortgage to the purchaser of that
house. The purchaser assumes all the obligations under the
mortgage, just as if the loan had been made to her.
Q: Does my current
mortgage contract allow a purchaser to assume my existing
A: If your mortgage
is an FHA or VA, the answer is “yes”, subject to the
agency’s approval of the buyer’s qualifications. If your
mortgage is conventional, the general answer is “no”, you
must get the lender’s permission for an assumption, and if
they agree it will be at the current market rate.
Q: What is a
A: It is a
provision found in all conventional mortgage contracts that
upon sale of the property, the loan must be repaid. If it
must be repaid, it cannot be assumed by the buyer.
Q: Are there any
A: Yes, due-on-sale
does not apply in many intra-family transactions, such as a
parent deeding a house to a child or a spouse, or following
a death or a divorce. But the exceptions don’t help home
sellers in typical arms-length transactions.
Q: Is there any way
around due-on-sale clauses?
Quite a few, of which the most common is the wrap-around
mortgage, executed without the permission or knowledge of
the lender. With a wrap-around
the seller takes a mortgage from the buyer and continues to
pay the old mortgage out of the proceeds of the new one. The
new mortgage “wraps” the old one.
S, who has a $140,000 mortgage on his home, sells his home
to B for $200,000.
B pays $10,000 down and borrows $190,000 on a new
mortgage given by S.
This mortgage “wraps around” the existing $140,000
mortgage because the seller as the new lender continues to
make the payments on the old mortgage.
and seller benefit by retaining the old low-rate mortgage.
When interest rates start to rise significantly, we will see
more wrap-around mortgages because the benefit from keeping
old mortgages in play increases.
Q: How is
the benefit split between buyer and seller?
A: The buyer
benefits by paying a mortgage rate below the current market
rate, which will be only partly offset by the higher price
paid for the house. The seller benefits from a higher price
on his house, and/or from the spread between the rate paid
by the buyer on the seller’s mortgage and the rate the
seller is paying on the old mortgage.
if the rate on the existing $140,000 loan balance is 4% and
the current market rate is 8%, the buyer might be charged 6%
with the seller earning a 2% spread on $140,000.
Q: What is
the down side?
A: The home
seller who does this violates his contract with the lender,
which he may or may not get away with. In some states,
escrow companies are required by law to inform a lender
whose loan is being wrapped.
If a wrap-around deal on a non-assumable loan does
close and the lender discovers it afterwards, the lender may
call the loan, or demand an immediate increase in interest
rate and probably a healthy assumption fee.
If the seller
has a new set of housing expenses and depends on the buyer’s
payment to him to fund the payment on the old mortgage,
failure of the buyer to pay poses a major problem for the
seller. The seller in such case must get the buyer evicted,
using whatever legal processes are stipulated in the sale
agreement and authorized by state law. In the meantime, the
seller’s delinquencies will drop her credit score.
The buyer is
also at risk. If the
seller for some reason does not make the payments on the old
mortgage, the lender can foreclose and take the property. In
that event, the buyer can retain the home only by making a
deal with the lender, and has little bargaining power in the
Q: Are there
other ways a home seller and buyer can keep an existing
low-rate mortgage alive that do not carry these risks?
Lease-to-own transactions usually have other objectives, but
since they do not involve paying off an existing mortgage,
they can also be used for the primary purpose of keeping
that mortgage alive. That is a topic for another day.