How to Assume a Mortgage from a Family Member

Understanding the process of assuming a mortgage starts with distinguishing between two types of assumptions: Simple Assumption and Novation Assumption.

• Simple Assumption: The buyer takes over the mortgage payments, but the original borrower remains on the loan. This means the original borrower is still legally responsible if payments are missed. This is often common among family members transferring property.
• Novation Assumption: This is a complete transfer of the mortgage from the original borrower to the new borrower. The new borrower becomes solely responsible for the loan, and the original borrower is released from any liability.

Process for simple 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.

Process for Novation assumption

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.

Assuming a family member’s mortgage can be an attractive option for homebuyers, especially in a market with high interest rates. However, like any financial decision, it comes with its own set of advantages and drawbacks. Here are some of the key pros and cons to help you make an informed decision.

Pros

• Lower interest rates: If the original loan had a lower interest rate compared to current rates, you stand to save significantly on interest costs.
• Reduced closing costs: Assumable mortgages often have lower closing costs than new loans, translating to immediate savings. Some lenders may even waive the home appraisal.
• Faster transaction: The process can be quicker than applying for a new mortgage, especially if opting for a Simple Assumption.
• Preserving a family home: Assuming a mortgage can be a way to keep a family home within the family, maintaining sentimental value and family legacy.

Cons

• Financial risk: If opting for a Simple Assumption, the original borrower remains liable, which can strain relationships if issues arise with payments. Similar risks can come with assuming a VA loan.
• Large upfront payment: You may need to pay the difference between the home’s current value and the remaining mortgage, which can be substantial.
• Potential for family conflict: Mixing financial agreements with family relationships can lead to misunderstandings or disputes, especially if terms are not clearly defined and agreed upon. This is where hiring an agent can be helpful.
• Limited loan choices: Not all mortgages are assumable, which limits your options if your family member’s mortgage does not qualify.
• Qualification requirements: In most cases, you must still qualify for the mortgage based on your credit and financial status, which can be a hurdle for some buyers.

“One of the downsides you can run into with an assumable loan transaction is the need for the new borrower to qualify with the lender,” explains Broesamle. “Another is the potential ‘due on sale’ clause in the original lender agreement that can require the loan to be paid off in full when the property is sold.”

Pitfalls to avoid when assuming a family member’s mortgage

Assuming a mortgage from a family member can be a beneficial move, but it’s not without potential pitfalls. Here are some issues to watch out for:

• Jumping in too quickly without contacting the lender or getting approval
• Overlooking loan terms of the existing mortgage
• Neglecting or not seeking professional legal and financial advice
• Ignoring credit red flags or risky debt-to-income (DTI) rations
• Failing to draft a clear written agreement, thinking you don’t need it for family
• Underestimating relationship strain and emotional and interpersonal challenges
• Buying the home under market value without researching tax implications

By being mindful of these pitfalls, you can navigate the process of assuming a family member’s mortgage more safely and effectively.

Financial and tax considerations when assuming a mortgage

Assuming a mortgage from a family member involves several financial and tax considerations that you should be aware of to avoid unexpected surprises. It’s important to approach this transaction with as much care as you would with a standard home purchase.

Financial considerations

• Upfront costs: Be prepared for any upfront costs, such as the difference between the home’s value and the remaining mortgage, and any assumption fees charged by the lender.
• Interest rate and loan terms: Evaluate whether the interest rate and terms of the existing mortgage are favorable compared to current market rates or other financing options that may be available.
• Credit impact: Remember, this mortgage will appear on your credit report. Late payments or defaults will affect your credit score and could impact the seller’s credit in a Simple Assumption.

Tax considerations

• Gift tax implications: If your family member is selling the house to you below market value, the difference can be considered a gift for tax purposes. This may have implications for the gift tax, which could affect your family member’s annual gift tax exclusion.
• Property tax reassessment: Transferring property ownership can trigger a reassessment of the property tax, potentially increasing your tax liability. Some states, like California, have recently limited the parent-child tax exclusions.
• Mortgage interest deduction: If you itemize deductions, you may be able to deduct mortgage interest. However, this depends on the loan amount and the purchase price of the home.

Deciding whether to assume a family member’s mortgage is a significant decision that hinges on both financial pragmatism and family dynamics.

Ultimately, if the financial terms are favorable, you’re prepared for the responsibilities, and you can maintain healthy family relations, assuming a mortgage from a family member can be a wise and fruitful choice.

However, if there are any doubts about the financial implications, the stability of the mortgage, or the potential for family conflict, it might be prudent to explore other home-buying options. HomeLight can connect you with a top-rate buyer’s agent in your area.

“An experienced agent can bring a lot of value,” Broesamle says. “Typically, I have an idea of where a buyer will need to be as far as their credit score goes, and what it takes to get the loan completed. I know the process. I know what it takes to finalize the paperwork and the sale.”

In the end, the right decision depends on your unique circumstances, financial goals, and family situation. Take the time to weigh the pros and cons carefully to make the best choice for your future home and financial stability.

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