Traditional Home Purchase or Assume Seller’s Mortgage?

by Kevin on August 14, 2008

I had a good friend call me last night for some advice. He and his wife are looking to purchase their first home. Through the friend-of-a-friend system they’ve learned of a couple that is desperate to sell their house. This isn’t in a formerly hot market like Las Vegas or Miami. It’s a small town. Essentially the sellers had to move for some reason and now just need to unload the house.

They had a buyer lined up, but it fell through. Now they really need to sell.

Here’s what they are offering: buy the house traditionally at a $20,000 reduction to the current price, or assume their mortgage (at a higher price), but with a locked in lower interest rate.

I told him I had never heard of assuming someone else’s mortgage. I would much prefer to do the “standard” way — mortgage, title insurance, closing costs — even if it cost more.

But I wanted to see if any of the readers out there had heard of this?


vilna bashi August 14, 2008 at 9:47 am

I have not heard about a seller’s mortgage in a long time. Heck, it has not been necessary until quite recently since banks were throwing money at home buyers. But I do remember the technique from the late 80s/early 90s. I have seen it a few times then, especially when a builder sold new construction. I suppose it was easier for a successful builder to get a loan for real estate development, while the buyer may have struggled to secure good financing.

Should your friend do it now? – That depends on a lot of considerations, but I would advise him not to forget that he will assume the risk of default. This means that he would have to go through the entire foreclosure process if the buyer defaulted on the mortgage in the future. In the case of default he would again become the owner of the house he just sold. Is he willing to take on that risk?

Kevin August 14, 2008 at 9:51 am

@Vilna: What he told me was they were offering a $1,500 transfer fee and then they would own the mortgage and the house (at the higher mortgage amount).

I told him it sounded weird and I would do a traditional deal.

Ricky August 14, 2008 at 11:34 am

I would defintiely go the traditional route. The difference in the interest rate would have to be huge to make up for a $20,000 discount in the selling price. If they re-sell the house in a relatively short period of time, the lower interest rate is essentially no good to them at all. The assumed instant equity could potentially be recouped depending on the market at the time of re-sell. There also seems like a lot of things that could go wrong with assuming the current mortgage. I am no expert, but I have never heard of anyone doing that.

Deb August 14, 2008 at 11:42 am

I recommend they find a very good real estate attorney with experience in assumptions instead of asking amateurs. This could be a great break or a pig-in-a-poke; and only an attorney will know the difference. Don’t ask realtors they have an agenda. It is still possible to request and pay for a title search and so forth when doing an assumption. I would think the attorney would recommend buying title insurance in a case like this.

Matt August 14, 2008 at 2:18 pm

I’m with DEB on this one. In today’s legal system, you can write nearly any document to cover your backside. If the numbers or facts could be made to work in my favor by assuming a seller’s mortgage – I would jump on it after consulting an experienced real estate attorney.

If the attorney advises against the seller’s mortgage, I would suggest they pressure the owner for a further reduction in asking price. If they’re desperate to sell, the fear of the last remaining buyer walking away from the deal is a fear factor bonus.

Another item uncovered here – if the buyers can get a better interest rate plus a reduction in price, it will save them lots of cash over the long run.

LAL August 14, 2008 at 4:40 pm

I’ve heard it’s pretty common. But you need a RE attorney for the details.

Ann August 14, 2008 at 5:51 pm

My parents did this back in the mid-70’s and basically what happens is everything is transferred into the name of the new owner. I’m not sure of the exact details as I was only 4 when it happened, but they still have the place – paid off the mortgage a few years back. I would check with a local escrow officer or real estate attorney, depending upon what’s normally used in your area, to see what , procedurally needs to be done in order to transfer title on both the property and the current assumable mortgage.

It could be a positive thing for your friends. How old is the current, assumable loan? There may be ‘instant’ equity there, already built in.
I would do the math, both ways, and see how it looks.

Rico August 18, 2008 at 5:45 pm

Mortgage assumption is not as rare as you may think. At a time when interest rates are higher than they were 3 or 4 years ago, assumption can be a great way to take on a mortgage at better terms. You do not assume the loan with the seller directly — the whole process happens with the bank. They will also require you to sign a Release of Liability, which means you are assuming 100% of the liability on the first note. This, too, is common.

Kevin August 18, 2008 at 9:09 pm

@Rico and everyone else: Interesting take. Thanks for joining the discussion.

Brad Clemons August 25, 2008 at 2:36 am

It actually will become more common. Check out the article yesterday in the Denver Post.
Also, the seller is released of liability once someone assumes the mortgage.

Kevin August 27, 2008 at 7:11 pm

@Brad: Thanks for the link to the article and the extra detail. You would think that would happen, but glad for the clarification. Turns out they didn’t end up getting the house, but they aren’t heart broken.

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