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Ask Dr. Don

Assuming a mortgage

Dear Dr. Don,
I have heard a little about assuming a loan. Could you please give me more information on this?
Thank you.
Martha Mortgage

Dear Martha,
An assumable loan is a loan where the borrower can transfer the terms and conditions of the loan over to a new borrower.

About the only way you see this taking place in consumer lending is with assumable mortgages. Even there, it's not widely used.

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Most mortgages have a due-on-sale clause that requires paying off the mortgage when a home is sold. Some real estate investors feel they can lawyer their way around a due-on-sale clause and by doing so, make a mortgage assumable. It's not a recommended practice.

Lenders don't like assumable mortgages because the two primary reasons that homeowners want to assume a mortgage are that interest rates have gone higher and they want to borrow at the lower interest rate on the assumable mortgage, or they have poor credit and can't qualify for a new mortgage loan at as good a rate as the assumable loan.

Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) mortgage loans typically can be assumed. Home buyers have to qualify to assume the loan. There may be a fee and/or a credit package involved in the transfer of an assumable mortgage, but overall the lender fees should be lower with an assumable loan than they are with new financing.

If the home buyer can't come up with a large enough down payment to buy the house with the assumable loan then a motivated seller will usually accept a second mortgage note for the balance.

-- Posted: Jan. 28, 2002

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