With the latest increase in financing rates we might be hearing a lot more about assumable mortgages. An assumable mortgage is one that the lender allows another borrower to take over or assume the mortgage without changing any of the terms of the mortgage. The new applicant takes over the obligation for the payments left on the mortgage and now are legally responsible for all the terms.
Before 2008 this used to be a great way for a buyer to get a mortgage without having to go through the formal approval process however the current regulations require the person assuming the mortgage to fully qualify for the mortgage financing in the same way they would for any mortgage- by showing credit worthiness and income verification.
Here are some points to consider when considering an assumable mortgage:
Benefits to the Buyer:
- No need to show source of down payment
- No additional insurance premium as the insurance has already been added to the mortgage.
- If interest rates are higher, can take advantage of the lower rate
- If the original mortgage had a longer amortization get.
Benefits to the Seller:
- No payout penalty
- Ability to walk away from their current mortgage.
- If you owe what you are selling it for then this is a great option.
- Already approved by the mortgage insurer, so you don’t have to worry about the insurers declining your property.
Disadvantage to Buyer
If the home is worth more than the mortgage to be assumed you have to come up with that difference on your own. Example: If the home is worth $300,000 and the mortgage to be assumed is $250,000 you would have to come up with $50,000 down vs. the 5% of the purchase price if purchasing with a traditional mortgage.
Disadvantage to Seller
If the buyer defaults on the loan after they have assumed, the seller can still be liable for the default under certain circumstances. CMHC has approved a policy which gives the seller an out if the buyer makes the first 12 months payments in a row. But if the buyer is late in the first year then the seller can be on the hook. Double check with your mortgage company before you decide to go with this option.
As you can see there are many advantages and disadvantages to an assumable mortgage. Depending on your situation this may be the perfect option for both seller and purchaser. If you do decide to go this route, it is important that the seller reviews their original mortgage documents to confirm if their current mortgage is indeed assumable. Once confirmed the seller should contact their lender’s customer service department to discuss the process.