The History of Assumable Mortgage Loans
At its most basic, Assumable Mortgage loans can be transfered to someone else without having to alter the original mortgage terms. The new party takes over the obligation for the payments left on the mortgage and is now legally on the hook for all of the terms. For this to happen, the original loan must have a clause in it that allows assumption. The majority of the time, the bank has to approve the specific assumption as well as the new borrower who will be taking over the loan. Just as with an application for a conventional loan through a bank, a borrower has to demonstrate ownership of sufficient assets and income, as well as the appropriate level of credit worthiness, to gain bank approval. In many cases, the person assuming the note must pay the bank a fee for the transfer.
There was a point in time when it was possible to assume someone else’s mortgage loan without having to go through the approval process. However, the housing collapse of 2008 and 2009 means that those days are over. Banks do as much due diligence on the new borrower in an assumable mortgage loan as they do for borrowers originating a loan in the first place.
Assumable Mortgage Loan Requirements
As with any mortgage, there are some risks that go along with an assumable mortgage note. If you are the person selling the house through an assumable mortgage loan, even after the buyer has started taking over the note, you can still be liable in certain situations. If the buyer defaults on the note, and the bank forecloses on the property but fails to receive the total balance remaining on the note at the foreclosure sale, the bank can sue the seller of the mortgage for the leftover funds. CMHC has approved a policy that gives the seller immunity from that litigation if the buyer makes current payments for 12 months in a row. However, if the buyer is late at all during that first year or starts to default earlier, the seller can be on the hook if the bank files a lawsuit.
There are also some advantages to entering an assumable note. Banks will frequently approve the assumption in a shorter period of time than they would a new mortgage, and in some cases the closing costs are lower. If the assumable mortgage was fixed, and interest rates have gone up since that original mortgage went into effect, those terms might be more alluring than a loan that is new, which would have to use market interest rates. If the seller has a mortgage at 4.25 percent, but market rates are pushing 6.5 percent, the buyer is likely to want to keep the terms of the first note.
Think of it this way — an assumable mortgage is structured similarly to a sublease, which involves a tenant leasing out a property to a third party. That tenant must get approval from the landlord in order to move forward with the sublease. What is different is that the property is actually being sold in an assumable mortgage situation. An example would involve a seller who has a home with a current value of $325,000. The mortgage balance is $275,000. The buyer has $35,000 to put down and offers $310,000 for the house. The seller accepts and discloses the beneficial terms of the mortgage to the buyer. So instead of going to a bank, the buyer would give the seller $35,000 and assume the mortgage balance of $275,000, paying the bank just like the seller did.
But what if you can’t get approval for an assumable mortgage loan? Remember, even though the approval process is often faster, you as the buyer will face many of the same requirements in terms of verifying your income and demonstrating a specific credit score. The good news is that Amansad Financial Services has access to a number of different financing options.
Assuming a mortgage in Canada
In Canada one of the most popular alternatives for financing is the private mortgage. We have connections with individuals and organizations who are looking to invest in the real estate market by serving as a lender. If your projected LTV ratio fits what the lender wants to see, and you have 25 or 30 percent to put down, we can connect you with a private lender. This gives you a chance to buy your home while still working on your credit so that the banks will approve your traditional loan when the private loan expires. Call one of our mortgage professionals about Assumable Mortgage Loans today!