Richard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
In today’s high-interest mortgage landscape, the idea of assuming a mortgage from a family member can be an appealing path to home ownership. But what does this process actually entail?
This guide breaks down what it means to step into a family member’s mortgage shoes and purchase their home. But navigating this course can be tricky, especially when family relationships and emotions are involved.
We’ll explore what loans are assumable, the pros and cons, and the financial, legal, and tax considerations to help you make an informed decision. Whether it’s keeping a beloved home within the family or securing a home with a lower interest rate, here’s how to assume a mortgage from a family member.
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Assuming a mortgage may sound complex, but for the context of this post, it’s essentially taking over your family member’s existing mortgage — the remaining loan payments, terms, conditions, and interest rate. This means you bypass starting a new loan, often avoiding the higher interest rates that can come with it.
“If you can assume a mortgage, this might be the most beneficial for you because you can try to obtain the lower interest rate and get lower costs,” says Eric Broesamle, a top Michigan real estate agent who has been helping families buy homes for more than 22 years.
For many, this option is like a financial shortcut in the journey of homebuying. It’s particularly attractive if your family member has locked in a lower interest rate compared to current market rates.
This transfer of responsibility from one family member to another can be a practical solution, especially when trying to keep a home within the family or seeking affordability in a challenging market.
When considering assuming a mortgage from a family member, it’s important to understand that not all mortgages are assumable. The ability to assume a mortgage depends largely on the type of loan and the lender’s policies. Here’s a breakdown of the common types of loans and their assumability:
If you’re looking to assume a family member’s mortgage, your first step should be to check with the lender to confirm if the loan is assumable. Additionally, assuming a mortgage also requires you to qualify for the loan just like any other homebuyer.
“That’s what’s important about speaking with the lender,” Broesamle advises his clients who are looking to assume a mortgage. “Once you talk to the lender, and we verify where your credit score is and what your approval rate is, then we can dive in to see if the loan is assumable.”
As with any real estate loan, the lender will assess your creditworthiness, income, and other financial factors to ensure you can handle the mortgage payments. Remember, assuming a mortgage is not just about taking over the payments; it’s about stepping into a binding financial agreement.
Exceptions to “due on sale’ provisions: Even if a loan agreement contains a “due on sale” clause, a federal law called the Garn-St. Germain Law allows confirmed heirs, spouses, or ex-spouses of homeowners to assume their mortgage loans. The law was put in place to ensure a widow, widower, or ex-spouse can retain their home even if they don’t qualify for traditional financing.
Understanding the process of assuming a mortgage starts with distinguishing between two types of assumptions: Simple Assumption and Novation Assumption.
1. Agreement between family members: Reach an understanding and agreement on the terms of the mortgage takeover.
2. Lender notification: Inform the lender of your intention to assume the mortgage.
3. Credit check: The lender may still require a credit check to ensure you can make payments.
4. Signing agreement: Sign an assumption agreement placing you on the loan contract, outlining the responsibilities and terms.
5. Begin making payments: Start making the mortgage payments according to the agreed terms.
1. Application to lender: Submit an application to the lender to assume the mortgage.
2. Credit and financial review: Undergo a thorough credit and financial review by the lender to assess your eligibility.
3. Approval from lender: Await approval from the lender for the mortgage assumption.
4. Release of original borrower: Ensure the original borrower is released from liability upon approval.
5. Legal documentation: Sign all necessary legal documents to formalize the transfer of the mortgage.
6. Begin new payment schedule: Start making payments under your name with the terms agreed upon with the lender.
For family members considering a mortgage assumption, the choice between a Simple and a Novation assumption often depends on the level of trust and the long-term financial implications for both parties. While a Simple Assumption might be quicker and involve fewer formalities, a Novation Assumption provides a clean break and full transfer of responsibility, which can be crucial for maintaining healthy family relationships in the long term.
For VA loan holders, the most ideal scenario is a veteran-to-veteran loan assumption, which can minimize the risk to your VA loan entitlement and future borrowing capabilities.
It’s important to check with your lender and gain a full understanding of what the assumption means for both the seller and the buyer.
A note about the selling family member’s equity: If you are buying the home for a market value above the balance of the original loan, you will still need to compensate the seller for the equity they’ve built up in their property — a combination of the home’s appreciated value and what they have paid off on their loan. This is true for any home purchase. You may need funds from savings or a separate loan to complete the sale.
For example, if you buy your parent’s $400,000 house, and they have an outstanding mortgage balance of $200,000, they’ve built up $200,000 worth of equity that belongs to them. At this purchase price, you would need to pay them the $200,000 at closing.