Sometimes it's okay to assume.
Have you ever heard of a mortgage that can be passed from one homeowner to the next, almost like a hot potato? Well, that's what an assumable mortgage is.
What is an assumable mortgage?
An assumable mortgage is a real estate secret weapon that can make buying a home a whole lot easier. Instead of getting a brand new mortgage, you can take over the payments from the previous homeowner. And the best part is, you may be able to enjoy the same low interest rates that the previous homeowner had, even if rates have gone up since they got their mortgage.
So, what do you need to know about assumable mortgages? First off, not all mortgages are assumable, so make sure to check with your lender or real estate agent. If you're in luck and the mortgage on your dream home is eligible, then you're one step closer to becoming a homeowner. Because, let's be real, who wouldn't want to save time and money in the home-buying process?
Considering an Assumable Mortgage: What You Need to Know
For Buyers: If you're looking to buy a home and have noticed that interest rates are higher now than they used to be, an assumable mortgage might be a smart choice. This option allows you to take over the seller's existing mortgage, potentially locking in a lower interest rate than what's currently available.
For Sellers: Sellers who are planning to downsize or move to a more affordable home might find an assumable mortgage beneficial, especially if you're still early in your mortgage term and facing prepayment fees. This way, you can pass on your mortgage to the buyer and avoid extra charges.
Seller's Liability: In certain areas, even after selling the property, the original owner might still be on the hook for the mortgage. If the new owner stops making payments, the lender might ask the original owner to step in and make those payments. However, some lenders may let the original owner off the hook if they agree that the new buyer is qualified to take over the mortgage.
Checking Mortgage Assumability and Fees: Before you get too far into the process, check with your lender to see if your mortgage is assumable. Be aware that lenders may charge a fee for transferring the mortgage. This fee, if applicable, should be outlined in your mortgage contract.
How do you get an assumable mortgage?
If you're thinking about taking over an existing mortgage, you need to know that getting an assumable mortgage isn't a guarantee. Even though you're taking over someone else's loan, you still need to meet the lender's qualifications.
First, it’s important to find a qualifying home by checking with the lender and homeowner to see if the mortgage is assumable.
And while you might be assuming the mortgage and avoiding the conventional mortgage application process, you will still need to make sure you meet the lender's qualifications, like having a good credit score, a steady income, and a solid debt-to-income ratio.
Then, once you've found a home and meet the qualifications, make an offer and include that you'd like to assume the mortgage. Take the time to review the loan terms, ask any questions, and make sure you're comfortable with the terms. Overall, just make sure you do your research, be organized, and ask plenty of questions to ensure a smooth process.
What are the pros of assuming a mortgage?
Here are the top reasons why an assumable mortgage might just be the best thing for you:
- You can keep the low interest rate: If interest rates have gone up since the original mortgage was taken out, you could be in for a real treat: with an assumable mortgage, you can take over the lower interest rate and save a bundle of cash in the long run. And in an age where interest rates in Canada have continuously gone up, assuming a mortgage at a lower rate is definitely a win.
- No need for a new mortgage: Imagine not having to go through the hassle of getting a new mortgage loan. With an assumable mortgage, you can just jump on board with the existing loan and get on with your life. It's like being handed the keys to your dream home, no hassle required.
- Bye-bye, closing costs: Taking out a new mortgage comes with a whole list of closing costs, like appraisal fees and loan origination fees. With an assumable mortgage, you can often sidestep these expenses and keep more money in your pocket.
- Keep the same amortization period: With an assumable mortgage, you'll often be able to keep the same loan term and amortization period as the previous homeowner. This means you'll be paying down your mortgage over the same time frame, and you'll know exactly how long it will take to pay off your loan. So what if the original loan term was 30 years and you assume the mortgage 10 years into it? You'll take over the remaining 20 years of payments and continue to build equity in your home over that time period.
What are the cons of assuming a mortgage?
And while there are some great benefits to taking over an existing mortgage, there are also some potential downsides to consider. Here are some of the cons of an assumable mortgage to keep in mind:
- You will need to qualify for the mortgage: Just because a mortgage is assumable, doesn't mean you'll be able to take it over just like that. Your mortgage lender will want to make sure you're financially capable of making the payments and that you meet their qualifications. So, if you have a low credit score or a limited income, you may not be able to assume the mortgage.
- You may need to pay a fee: Some lenders may charge a fee for allowing a mortgage to be assumed. This fee could be a percentage of the loan amount or a set dollar amount. Be sure to check with your mortgage lender to see if this is the case, so you can budget accordingly.
- You'll be taking over the original loan terms: While most times assuming a mortgage comes with great benefits, there are some situations where that may not be the case. If the original loan had unfavourable terms, like a high interest rate or prepayment penalties, you'll be taking those terms with you when you assume the mortgage. So, it's important to review the loan terms carefully before making a decision.
- Down payment requirements: If you're assuming a mortgage, you may still be required to put down a down payment. If the value of the home has risen since it was originally bought, your down payment may be higher to reflect the current market value. Think of it as the value of the home, minus the outstanding mortgage balance is how much down payment you’d need. That means, if the home you’re looking to assume is now worth $550,000 but there is $450,000 left on the mortgage, you as the buyer would need to pay the seller $100,000. So, while an assumable mortgage can be a great option, make sure you understand what the down payment requirements are and if they've changed since the original mortgage loan was issued. You’ll need to provide a source of funds and also ensure that your closing lawyer is also different from the seller’s lawyer to avoid a conflict of interest.
To assume or not to assume?
Assuming a mortgage may not be as common, but they are still a viable option for Canadian buyers and sellers. If you've done your research, asked all the important questions, and the benefits outweigh the risks, it could be the perfect fit for you!
Want to learn more? Connect with one of Pine’s mortgage agents and get started on your home buying–and potential mortgage assuming—journey.
