Legally assuming a seller's mortgage

When you assume a mortgage, you take over the home seller's existing mortgage rather than getting your own.

One notable advantage of assuming a mortgage is that buyers can get the benefit of a lower interest rate. During times when rates are climbing, taking over a mortgage with a lower, fixed rate can be better than applying for a new home loan. Another noticeable benefit is the lack of closing cost. Typically, closing fees are significantly smaller when assuming a mortgage.

While this presents a viable option for home buyers who are having trouble obtaining a home loan with better terms on the market, there are some legal hurdles and risks that should be noted.

Lender approval

Mortgage providers typically don't allow assumable home loans these days, as they present a large financial risk. Additionally, even if a lender allows a buyer to take over a mortgage, there are still strict requirements for approval, including a certain down payment amount, credit history evaluation and steady income.

Loans from the U.S. Federal Housing Administration and Veterans Administration are typically able to be assumed by a buyer, pending approval.

Homeowner equity

If sellers have a sizeable amount of equity on the home, they'll likely require the buyer to make up the difference between the home's market value and the remaining value of the loan. This means that for a property valued at $160,000 with a mortgage value of $100,000, the buyer is responsible for the additional $60,000.

Although the goal of assuming a mortgage is to avoid getting a new home loan, buyers will need get a loan if they don't have the cash on hand to cover the the equity.

'Due on sale' clauses

Some buyers and sellers may consider an arrangement where the new homeowner pays off the mortgage without actually purchasing the property on paper. While this could seem like a reasonable option, it poses a risk for the seller if the buyer decides to skip payments.

The same is true if the property is purchased but payments are still being made in the name of the previous owner. Due on sale clauses, which state that the full balance of the loan is due when the home is sold, prevent this from occurring.

An advantage for sellers

Assumable mortgages have been useful for many homeowners who have been struggling to make their monthly home loan payments. Rather than losing their home to foreclosure, they can offer their property and their mortgage to a potential buyer, thereby saving their credit if they want to purchase a home again in the future.

Sellers have to ensure they receive a liability release from the lender. Without this documentation, the original owner is still responsible for payments, which could be problematic if the new owner is not paying on the loan balance. If the payments are seriously delinquent or the mortgage is foreclosed, the previous owner's credit can be marred.

A final note about assumable mortgages

Not many home buyers know that such arrangements are even possible. Even for those who are, there aren't many homeowners offering for a buyer to take ownership of their mortgage.

Typically, when home values are on the rise and foreclosure rates are down, assumable mortgages are more scarce than usual. However, such good news from the real estate market often means that buyers are afforded many home loan deals without taking on an existing mortgage.

Home buyers who are fortunate enough to assume a home loan should still get a thorough home inspection to ensure the property is free of structural damage or other issues.