Assumability (Mortgage Assumption)

Definition:
Assumability, or mortgage assumption, is a feature that allows a new borrower to take over an existing mortgage from the original borrower. In a mortgage assumption, the new buyer steps into the seller’s existing mortgage terms, including the remaining balance, interest rate, and payment schedule. This option can be appealing when interest rates have risen since the original loan was secured, as the buyer may benefit from a lower locked-in rate compared to current market rates.

How mortgage assumption works

With an assumable mortgage, a buyer and seller agree that the buyer will “assume” the seller’s mortgage, taking on the responsibility for the remaining loan balance and all future payments. However, this arrangement requires lender approval to ensure the new borrower meets the lender’s credit and income requirements. Once approved, the buyer takes over the existing mortgage’s terms, and the seller is typically released from future liability.

Approval process: While mortgage assumption requires the lender’s consent, some lenders allow this without full re-qualification under specific conditions, though creditworthiness is still assessed.
Fee structure: Assumable mortgages may involve fees, such as processing and legal fees, which can vary depending on the lender.

Key features of assumable mortgages

Lower interest rates: When interest rates are higher than the original loan rate, an assumable mortgage allows the new borrower to “inherit” the lower rate, providing significant long-term savings.
Faster closing process: Since an assumption does not involve originating a new loan, the closing process can be quicker compared to securing a new mortgage.
Cost savings: Buyers may save on appraisal and closing costs that are typically required with new mortgages.

Assumable mortgages can be advantageous in the right market conditions, allowing buyers to benefit from the original terms of the seller’s mortgage, while sellers gain a valuable selling point for their property.

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