About Assumption Clause:
An assumption clause is a provision in a mortgage contract that allows the seller of a home to pass responsibility for the existing mortgage to the buyer of the property. In other words, the new homeowner assumes the existing mortgage and—along with it—ownership of the property that secures the loan. The buyer must typically meet credit and other qualifications and the guidelines for assumption clauses may vary by loan type.
- An assumption clause allows the seller of a home to pass responsibility for an existing mortgage to the buyer of the property.
- The new buyer must meet credit and other qualifications.
- Assumption clauses are attractive when the interest rate on the current mortgage is lower than the current rates.
- These clauses can also help buyers avoid closing costs.
- However, for most homeowners, the benefits of an assumption clause are theoretical because conventional mortgages generally prohibit the practice.
How Does an Assumption Clause Work?
If the interest rate on an existing mortgage is lower than current market rates, an assumption clause becomes an attractive selling point. Also, the buyer can avoid many closing costs, though there are some fees involved in assumptions. Some of the costs will include a title search, document stamps, and taxes.
For most homeowners, the benefits of an assumption clause are theoretical because conventional mortgages generally prohibit the practice. Banks frown on assumption clauses because they write mortgages based on the creditworthiness of the original borrower, not an unknown later buyer.
The new owner’s ability to repay may be challenging to evaluate, and the bank may be reluctant to take on their risk. Moreover, even if a bank were to approve the creditworthiness of a new borrower, it would lose out on the down payment and closing costs incurred with a brand-new mortgage.
Pros and Cons of an Assumption Clause:
If you have an opportunity to assume someone else’s mortgage loan, it’s important to consider the advantages and potential disadvantages of exercising an assumption clause. Though these types of loans still exist, they may be more difficult to find or to qualify for versus taking out a brand-new mortgage loan. It could also be to your advantage to weigh your options with the best mortgage lenders for getting a new home loan to purchase a property if you’re ready to buy.
How Does an Assumption of a Mortgage Work?
An assumable mortgage clause allows a buyer to take over mortgage payments for an existing loan on behalf of a seller. The original homeowner is released from any liability toward the loan, while the buyer assumes responsibility for the mortgage payments and ownership of the property.