Mortgage Assumption

Financial Dictionary -> Mortgages -> Mortgage Assumption

Mortgage Assumption is the process by which a buyer purchases a house with an existing Mortgage and assumes the debt instead of taking out their own mortgage. However the seller is still a liable second party to the mortgage lender unless the buyer releases them in the terms of the agreement. This is a rare occurrence due the complexity and liability involved.

An example of how this might go ahead is as follows.

Bob holds a $250,000 mortgage and is selling his house. He has already paid $50,000 off the mortgage and therefore has $50,000 in equity, which means he technically owns $50,000 worth of the property. If his friend Jim wants to buy the house and assume the mortgage, he'd pay $50,000 up front so Bob gets what he is owed, and then he'd take on the existing debt of $200,000, making monthly payments as usual.

One reason why somebody might assume a mortgage is because it is better than current mortgage prices. Equally somebody may sell a home and mortgage because they wish to get their equity and be free of debt. Another common reason for assuming a mortgage is that it saves on the closing costs or the potential higher interest rates of a brand new mortgage.

Occasionally due to an oversight or fraud a mortgage lender may end up pursuing the new owner of a home, claiming that they are liable for the previous owner's mortgage debt. This can often occur if a third party collection agency takes over a long standing mortgage dispute and is not informed about the sale of the property.