A large number of home sales in the United States are financed by mortgages, and when these homes go back onto the market many of them are still mortgaged. Home buyers are frequently presented with the option to “assume” the mortgage or buy the property “subject to” the mortgage. Understanding the difference is important for every buyer considering these options.
“Assuming” the Mortgage
Generally speaking, when a buyer assumes a mortgage, they assume personal liability for the outstanding debt of the mortgage with the bank’s permission. This means that the seller’s name no longer appears on the loan, and is replaced by the buyer’s. A buyer cannot just assume a mortgage as a natural part of the home buying process, however. Just like every other home loan, a buyer hoping to assume a mortgage must qualify for that loan.
Buying “Subject to” the Mortgage
Unlike when you assume a loan, when you buy a home subject to a mortgage you are not assuming personal liability to repay the loan. While the deed is transferred to your name and you agree to make the mortgage payments, the person selling you the house is still responsible for paying the loan. If, down the road, you decide to sell the property, you are not responsible for continuing to make mortgage payments to the lender. Rather, the original borrower is the primary person who is liable to the lender.
Why Assume a Mortgage or Buy Subject to a Mortgage?
At first glance, the idea of buying a home subject to a mortgage or assuming the existing mortgage may seem overly complicated and risky. Why would you agree to take on responsibility for someone else’s debt? There are some strong arguments in favor of this, however, chief among them being that if interest rates are rising, buying subject to or assuming a pre-existing mortgage can be a way to finance your home at lower-than-market rates. For example: if you have a $250,000 mortgage, and the current interest rate is 8% but the seller of the home you want to purchase has a 5% fixed interest rate on their mortgage, assuming or buying subject to their mortgage that can add up to a lot of savings over time.
Is Assuming or Buying Subject to a Mortgage Right for Me?
There are many different factors which go into buying a house with an assumable loan versus buying a house subject to a mortgage. The amount of a down payment you are able to make will likely be one factor, but you will also need to carefully examine the terms of the existing loan. Our experienced Chicago, Illinois, real estate attorneys help many home buyers each year weigh their options, and can advise you of all of the risks and benefits.
Questions About Assuming or Buying Subject to a Mortgage?
Buying a house is complicated, but it does not have to be confusing. If you are considering buying a home subject to a mortgage or assuming a mortgage, contact M&A Law Firm, PC, to discuss your questions and learn about risks associated with your options. Our hardworking Chicago, Illinois, real estate attorneys love helping make home buyers’ dreams come true and are ready to help you!
