An assumption of mortgage is something you may not ever have heard of, but it’s a way that some sellers are able to get rid of their home when more traditional methods just won’t work. After all, in a buyers market it can be difficult to get that house off your hands without allowing the bank to take it over. But just what is an assumption of mortgage? It’s when someone else takes over the mortgage on your property so you no longer have to pay and you get to walk away from it without any worries.
Checking Out the House
Let’s say Mary and Joe have owned their home for 5 years but they’ve fallen into some hard times. They just can’t afford the house anymore and they actually haven’t even been able to make the payments in quite a while. They’re looking at a bank foreclosure but they really don’t want to let the bank just take their home so they decide to try and sell their house as quickly as possible and get anything they can for it. The bank however, is pretty picky, and wants to make sure they’re going to get everything that’s owed to them, since they know Mary and Joe can’t afford it.
You come out to check out the house and realize there’s just not enough value to the home to make it worth the asking price. You can’t even make a reasonable offer because you know there’s no way the bank is going to accept it and therefore Mary and Joe can’t afford to accept it. There’s just way too much money owed and not enough equity in the house. But you do like the house and you think it’s going to be a good flip house or investment property, if you could get it for a lower price anyway. That’s where mortgage assumption comes in.
Assuming the Mortgage
With a mortgage assumption you can talk to Mary and Joe and their bank and find out how much equity they have in the house. That’s the amount of money they’ve actually paid so far. So if they bought a $200,000 house and they’ve made payments in the amount of $30,000 then the equity in the house is $30,000. With a mortgage assumption you would pay them up to $30,000 and they would hand over the title to their home. You would own it for that $30,000 but you would also own their now $170,000 mortgage, which you would owe to the bank.
One benefit of assuming a mortgage is that you won’t have to go through the entire underwriting process to get a loan on the house and you don’t have to spend a whole lot of extra money. You would only need to negotiate with the original owners and then you would need to pay a few small fees to transfer the house over from the previous owners over to your name. In just a short amount of time you will own the house and be in the same position as owner that Mary and Joe were (except you can afford to pay the mortgage payments).
What You’re Left With
Now you’re able to do whatever you want with the house to start making some money and Mary and Joe get to walk away with their $30,000 and look at getting a new place instead. Everyone gets to leave happy. It’s definitely a winning situation. But it doesn’t always work out quite so well when someone wants to assume a mortgage or when a homeowner wants someone to assume their mortgage.
Not all banks or mortgage institutions allow this type of mortgage assumption so you’ll need to talk with the institution first to make sure it’s even going to be possible. You’re also not going to get just anyone to jump on the offer because it’s not really ideal for a homeowner unless they’re really in a distressing financial situation. As an investor, it’s also important to look at the equity they have in the home (the amount they will want to walk away from it) and the value of the home as well as how much money is still owed. You’re not going to have a lot of negotiating power with the bank after all since you’re simply taking over responsibility for the mortgage.