A home loan, also called mortgage, is a type of credit which you receive to buy a house and in return, you promise to pay the borrowed amount plus interest on regular basis for a certain number of years which ranges from 15 to 30 years. The house that one buys with the loan serves as security for the lender. Therefore, in case you fail to make the monthly payments on the home loan, the lender is entitled to seize the house and sell it to recover the remaining balance.
There are cases where you may wish or compelled to transfer the existing home loan that you have with your existing lender to another person. It is important to understand that there can be a broad range of reasons why a person might be interested in assuming your mortgage. For instance, if you require moving and selling the house, the buyer may be interested in assuming the existing home loan through a process called loan assumption rather than apply for a unique mortgage note. If the original home loan has a lower interest rate as compared to the current interest rates, assuming the current mortgage can be more beneficial to the buyer than obtaining a new home loan. Another reason for mortgage transfer is the change in relations – for instance, if due to divorce, one of the spouses remains the owner of the house, but he/she stays responsible for the repayment of the mortgage which was previously taken by both of them.
The specifics of how one can go about transferring an existing mortgage from one individual to another are described below:The specifics of how one can go about transferring an existing mortgage from one individual to another are described below:
Understanding Loan Assumption The legal process of transferring the home loan or mortgage from one owner to another is called assuming an existing home loan. The initial borrower in most cases transfers the ownership of the home to a new buyer who then assumes the responsibility of making payments on the credit or loan and other stipulations as agreed in the mortgage agreement. It facilitates the process of a home purchase transaction and can help the buyer in obtaining a home loan with more favorable terms and rates than those prevailing at the moment.
In order for a buyer to get your mortgage, your lender must first agree that the buyer has the necessary financial capacity to assume the loan and its requirements. Qualitative features may include the buyer’s income, other debts, credit, history, the down payment amount and so on Most standard loans are assumable by other buyers; however, the rules for assuming the conventional loans can be more rigid for some government backed programs.
How Loan Assumption Works Below are the typical steps involved when transferring an existing home loan from seller to buyer:Below are the typical steps involved when transferring an existing home loan from seller to buyer:
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The mortgage terms are reviewed – These include the remaining balance, interest rate, monthly payments and payment frequency, loan type and program information. Any conditions that might be included should be clear for the buyer to know and be in a position to observe.
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Property valuation is done – The property is valued to establish the current fair market value and to make sure there is enough of it to qualify.
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The credit and income documentation - This involves presenting proof of income and assets to prove the buyer’s ability to make the required payments on the loan, as well as other costs and obligations.
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Amount to be financed is depicted – The buyer has to come with at least 20% down payment most of the time to cater for the home loan.
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Closing process finalizes transfer – Closing is the process where the assumption of the loan is finalized between buyers and sellers. A legal transfer of home ownership also occurs.
After the process is done, the new owner acquires ownership title to the property and legal liability to make timely mortgage payments as per what the seller used to.
The advantages and disadvantages for home buyers As useful as it may be to assume an existing mortgage, it is also important for home buyers to consider the following noteworthy benefits and drawbacks associated with this approach.
Potential Pros:
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Lower Fixed Rates - If you assume lower fixed rates are less expensive in the long term. This makes it possible for buyers to secure a bigger loan amount and access better located properties.
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No Down Payment Constraints – The amount of down payment needed in case of assumption may sometimes be lower as no new loan is initiated. This in turn reduces the saving requirement on the side of the home purchaser.
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Less paperwork and verification – This means that loan assumptions close much faster than the regular mortgages. This enables the buyers to access the keys and occupy their new home earlier than they would have in the absence of the loan.
Potential Cons:
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Tougher Credit Standards – Qualifying for loans based on other credit requirements such as minimum credit score and DTI could be difficult for some buyers. Not even pre-approvals are certain to get them an end-approval later on.
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No Current Loan Options – Buyers do not have options of the current loan type and other features are only available for newly originated mortgages that were not available before like fixed durations
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What makes it complicated to negotiate on price is that sometimes the list prices are actually set by the sellers expecting buyers to accept such prices since they are presented with the value of the low interest rate. This relinquishes whatever bargaining power the buyers may possess in the transaction.
Procedures for Availing Loan for New Buyer If as a seller you find a suitable buyer who agrees to take over your mortgage, you can go ahead and transfer loan responsibility.
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Read the loan documents – Look at your mortgage papers to know whether an “assumability” clause has been included that allows the option. Clarify any restriction such as the characteristics of the assuming parties that may meet the criteria for eligibility.
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Intention helps processing – The mere intention you inform your lender early is helpful in the processing later. Sometimes, to ensure efficiency of the turnover, lenders may have their own application forms on smooth assumptions.
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Document the financials of the buyer - The copy of the purchase offer, the employment of the buyer, his or her bank account statement, and assets would have to be availed to the lender to enable assessment of the qualification for the transfer of the home loan.
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Contributes to the underwriting process – Further documentation or explanation may be requested as the loan underwriting assessment proceeds. Colloborate effectively to ensure the success of this review.
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Closing - The process of buying or selling property is completed with the conveyance of a deed to the buyer. Loan assumption forms are also signed off conclusively.
Applying these steps with your buyer guarantees the best odds of getting through the mortgage assumption without any home debt.
