What it means
There are two quite different situations that share this name. In the first, the lender assigns the loan to another lender or investor, and the borrower simply starts paying a different company while the terms stay the same.
In the second, the property changes hands and the buyer takes on the existing loan, often described as assuming the mortgage. This needs the lender's agreement, because the lender must be satisfied that the new borrower can afford the repayments.
The lender usually runs the same income and credit checks it would run on a brand new applicant. Many loans contain a due-on-sale clause, which lets the lender demand full repayment if the property is sold.
That clause is why a buyer cannot usually inherit a seller's cheap old loan without permission. Assuming a loan can be attractive when the existing interest rate is lower than rates on offer in the market.
The buyer has to pay the seller the difference between the sale price and the outstanding balance, which means a larger cash payment up front. Joint borrowers add another wrinkle.
If one name is removed from the loan, for example after a separation, the lender will test whether the remaining borrower can carry the whole payment alone. Costs are worth checking.
Lenders may charge an assumption or administration fee, solicitors or conveyancers need to handle the legal paperwork, and some jurisdictions apply a transfer tax on the property itself. A buyer should compare all of this against simply taking out a new mortgage, which may be faster but is usually more expensive in interest.
In practice
Real-world examples.
Example
A buyer in a small town finds a house whose seller has a 20-year loan at a rate well below market. With the lender's written consent, she assumes the loan and saves several thousand dollars a year in interest. She still has to bring a larger deposit to cover the gap between the price and the balance.
Example
A regional bank sells a package of 500 residential mortgages to a larger lender to free up capital. Borrowers keep their existing terms and are sent a letter naming the new servicer. Monthly payments, interest rates and maturity dates are unchanged, but the payment details must be updated.
Example
A divorcing couple transfers a jointly held mortgage into one partner's name. The lender reviews that partner's income and credit before releasing the other from the debt. If the lender refuses, the couple may have to sell or refinance instead.
Formula
Calculation
The cash a buyer must find when assuming a loan is:
Cash needed = Purchase price - Outstanding mortgage balance + Transfer costs
An illustrative home sells for $400,000 and the seller's remaining balance is $240,000. The buyer takes over the loan and pays the seller $400,000 - $240,000 = $160,000. Adding a $1,500 lender assumption fee and $2,500 of legal costs gives total cash of $160,000 + $1,500 + $2,500 = $164,000. If the assumed loan carries a rate 2 percentage points below the market, on $240,000 that is about $4,800 less interest in the first year.Case study
Seen in the real world.
Fairhaven Row Properties is an illustrative, fictional landlord that wanted to buy a small block of flats. The seller's existing loan was $900,000 at a rate noticeably lower than any new loan on offer.
Fairhaven asked the lender to approve a transfer of the mortgage to its name, because the saving on interest was a large part of the case for the purchase. The lender required proof of rental income, a clean credit record and an assumption fee of 1% of the balance, which came to $9,000.
After weighing the fee against the interest savings of about $18,000 a year, the landlord went ahead. In this illustrative case the approval took eight weeks, so the buyer negotiated an extended completion date to avoid losing the deal. Fairhaven also asked the seller to leave a small retention in escrow in case the lender declined at the last minute.
Watch out
Common mistakes.
- Assuming a loan can be passed to a buyer automatically, when most lenders must approve the new borrower first.
- Ignoring the due-on-sale clause and risking a demand for immediate full repayment.
- Forgetting that the seller may stay liable unless the lender formally releases them.
Questions
People also ask.
What is the difference between transferring and refinancing a mortgage?
A transfer keeps the existing loan and moves it, while refinancing replaces it with a brand new loan on new terms.
Does the interest rate change when a mortgage is assumed?
Normally not, because the buyer takes the existing terms, which is the main attraction when market rates are higher.
Who pays the costs of a transfer?
That is negotiated, but the buyer usually bears the lender's fee and legal costs unless the contract says otherwise.
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