What You Should Know about Mortgage Assumption and Assignment for the Real Estate License Exam
Mortgage assumption and assignment are concepts that Real Estate License examiners will expect you to know about. A mortgage assumption takes place when a new party takes over the obligations of another person’s mortgage debt, and it usually requires the approval of the lender.
A typical situation in which someone may assume a mortgage is when a buyer buys a house from a seller who has a mortgage loan at a much lower interest rate than is currently available to the buyer.
The buyer pays the seller the difference between the sale price and the outstanding balance of the seller’s mortgage (which the buyer is assuming) either in cash or with a new mortgage. By assuming the old mortgage, the buyer also agrees to take over the payments on the remaining balance due.
When buying a property, you need to recognize the important distinction between taking over someone else’s mortgage loan obligations by assuming a mortgage and not doing so by purchasing the property subject to the mortgage. This distinction makes a difference, if during a foreclosure, not enough money is raised from the sale of the property to cover the debt.
If a property is purchased with the buyer assuming the mortgage, the buyer becomes personally liable for the portion of the debt not covered by the foreclosure sale. Say you buy a house for $200,000 paying the seller $100,000 cash and assuming a mortgage on which there is $100,000 left to pay.
You lose your job, can’t pay your mortgage, and to make matters worse, real estate values have plummeted. The lender forecloses and can sell the house only for $90,000. The lender holds you personally responsible for the remaining $10,000 of the mortgage debt that the sale of the house did not cover.
If the property has been bought subject to the mortgage, then the buyer is not personally responsible for the remainder of the debt owed by the seller. In some cases the original owner may be liable.
Say you buy a house for $200,000 with $100,000 cash to the seller subject to the seller’s mortgage, which has an unpaid balance of $100,000. You lose your job and real estate values take a nosedive. The lender forecloses and because of lower real estate values can sell the property only for $90,000. The lender cannot hold you responsible for the $10,000 not paid by the foreclosure sale.
When someone is assuming a mortgage or paying off a mortgage early, the borrower (mortgagor) asks for a certificate from the mortgagee stating the amount that currently is due on the loan so they know exactly how much is due on the loan. This statement is called an estoppel certificate or reduction certificate.
An alienation clause in the mortgage loan agreement helps lenders prevent or control future assumptions of a mortgage loan by a new borrower. The alienation clause, which also is known as a due on sale clause, call clause, or resale clause, requires the borrower to pay off the loan in full immediately upon sale of the property.
Instead of requiring immediate payment in full, the lender can permit the new buyer to assume the mortgage. If the original mortgage loan’s interest rate is lower than the current market rate for the type of loan being sought, the lender may grant permission to assume the loan only at a rate closer to or at market levels.
An assignment of a mortgage is the change in the person or institution to whom the debt is owed on a mortgage without changing the terms of the loan. The assignee, the new debt holder, is entitled to payment of the debt just as the original lender was. Remember that assignment involves a change in the mortgage, that is, the lender. Assumption involves a change in the mortgagor, the borrower.