There are rare cases where assuming a loan can also be beneficial to buyers. When assuming a loan, it must be clear to the buyers how much will be assumed and will it be cheaper?

Will assuming a loan to acquire a new property be a good deal? It really depends on several factors. To help analyze the situation better, the differences between the two are discussed further.

Assuming a mortgage vs. getting your own mortgage

When assuming an existing mortgage, the buyer will pay some cash to the seller to repay the amount of equity that the seller has in the home. It's kind of like a down payment, since it is cash paid directly from the buyer to the seller.

The down payment made when a buyer get a mortgage is done because the lender requires it. The lender requires equity in the house in case the buyer doesn’t make payments right away and the property has to be repossessed.

On the other hand, when mortgage is assumed, the buyer doesn’t need to satisfy the bank, but has to compensate the seller for the amount of equity that was put in the property (i.e., the amount that the seller paid as a down payment, plus the amount of principal payments made towards the loan) Also, added is the value of the appreciation of property since the time the seller bought it.

The amount the buyer will pay the seller could vary, depending on how much the owner put down when the house was bought, how much payments was made, and how much the property has appreciated during that time.

If the purchase price is $150,000 and there's $100,000 left on the mortgage, then the buyer either have to pay that $50,000 difference in cash, or get a separate loan for that $50k. On the other hand, if the purchase price is $150k but there's $140k left on the mortgage, then the buyer only have to come up with $10k.

An assumed loan will be paid off faster since there was already a number of a month or years when the buyer will be starting to take over the payments. Another advantage is that when assuming a loan, the buyer also avoids having to pay most of the Closing Costs that will be incurred when getting your own mortgage.
If the house is sold with a non-qualifying assumption the buyer doesn't have to pass a credit check or demonstrate his/her ability to pay the mortgage.

If it's a qualifying assumption, then the buyer has to consider the following.

What is there to watch out for?

* First of all, most houses these days aren't sold with assumable mortgages -- qualifying or not. Usually the buyer has to get his/her own mortgage. Banks have increasingly refrained from having their mortgages assumed, and even if there's no such prohibition, most sellers don't like to sell this way anyway.

* Second, the buyer probably has to come up with a lot of cash to pay the seller for his/her equity in the house. If the buyer has a lot of cash available, he/she could probably qualify for his/her own mortgage and wouldn't need to assume one.

* Third, the interest rate on the mortgage that will be assumed might be higher than the rate you could get on a brand-new mortgage from a bank now.

* Fourth, while the buyer can insist on a Fixed Rate mortgage if he/she is getting his/her own loan, the buyer might be assuming an Adjustable Rate mortgage, which might be a worse deal. The buyer must look at the numbers and the terms to know for sure which could be more advantageous.

Two things to summarize what were discussed above:

1. Assuming a mortgage is often a good deal when a buyer pays no more than 10-20% of the purchase price in cash, and when the interest rate isn't higher than current interest rates.

If the buyer has to put more money than 10-20%, then he/she might be putting in too much money in the house. It might be better for him/her buy a different house with a smaller down payment, and invest the extra cash somewhere else.

2. The buyer should get a copy of the loan papers (note) from the seller so he/she can review the exact conditions of the loan. Also, he/she should get an assumption package from the lender, which will tell him/her what has to be done to assume the loan.

Before assuming a loan… it is best that you know the numbers.