Sellers who Offer Financing/Assumable Mortgage - how Feasible is this?

[Nir]

Hi Everyone,

I often see properties for sale where seller is offering/suggesting that the buyer assume their mortgage. seller does NOT require them to, just as an option.

However, in many cases the principle of the seller`s mortgage is much lower than the mortgage amount required.

Example:

Property price: 500K
Seller holds a mortgage at 250K that the buyer can assume.
Buyer has only 100K to put down his own money
Therefore, additional funds required to purchase: 150K

In the above example, what are usually the BUYER`s REAL OPTIONS to close the deal:

(a) assume the seller`s mortgage and look for a 2nd mortgage
OR
(b) not assume seller`s mortgage and just look for another "regular" mortgage - say 80% of purchase price (400K) and put 100K down or ask seller for a VTB.

How can the buyer accept the seller`s offer (a) to assume his mortgage if no bank will provide the additional 150K required AND allow a 2nd mortgage - the one at 250K from the seller?

In other words, is it correct that assuming a seller`s mortgage is usually possible when buyer has enough funds to pay the rest without taking another mortgage?

THANKS.

 

[julieCEO]

QUOTE (investmart @ Apr 6 2010, 03:21 PM)
Hi Everyone,



I often see properties for sale where seller is offering/suggesting that the buyer assume their mortgage. seller does NOT require them to, just as an option.



However, in many cases the principle of the seller's mortgage is much lower than the mortgage amount required.



Example:



Property price: 500K

Seller holds a mortgage at 250K that the buyer can assume.

Buyer has only 100K to put down his own money

Therefore, additional funds required to purchase: 150K



In the above example, what are usually the BUYER's REAL OPTIONS to close the deal:



(a) assume the seller's mortgage and look for a 2nd mortgage

OR

(b) not assume seller's mortgage and just look for another "regular" mortgage - say 80% of purchase price (400K) and put 100K down or ask seller for a VTB.



How can the buyer accept the seller's offer (a) to assume his mortgage if no bank will provide the additional 150K required AND allow a 2nd mortgage - the one at 250K from the seller?



In other words, is it correct that assuming a seller's mortgage is usually possible when buyer has enough funds to pay the rest without taking another mortgage?



THANKS.




Actually they do so to get more prices rather than the original price.

 

[fumbrunner]

Sometimes it is due to the fact that they have a favourable rate that the buyer might want to take advantage of. If the buyer has a sufficient downpayment, they won`t need a 2nd mortgage.

 

[DaveRhydderch]

You generally can assume the seller`s mortgage, BUT if that mortgage was ever insured, the seller remains on the hook for the mortgage. So even if the mortgage was insured 15 years ago and half of the principle has been paid off, the seller would remain on the hook if the buyer defaulted on the mortgage.

Generally sellers want someone to assume their mortgage so they don`t have to pay out fees for breaking their mortgage.

 

[Nir]

Thanks everyone!

if you agree banks do not allow 2nd mortgages, then it`s just surprising so many sellers offer buyer to assume a mortgage they hold at only around half the asking price(!) I guess in like 99% of such cases buyers do NOT assume seller`s mortgage.

Regards,
Neil

 

[Cargren]

QUOTE (investmart @ Apr 13 2010, 12:27 PM) Thanks everyone!

if you agree banks do not allow 2nd mortgages, then it`s just surprising so many sellers offer buyer to assume a mortgage they hold at only around half the asking price(!) I guess in like 99% of such cases buyers do NOT assume seller`s mortgage.

Regards,
Neil

Quite often you can assume and the lender will gladly allow you increase amount and blend the interest rates of the existing mortgage with the current rate.

 

[Thomas Beyer]

QUOTE (investmart @ Apr 6 2010, 02:21 PM) ..
In other words, is it correct that assuming a seller`s mortgage is usually possible when buyer has enough funds to pay the rest without taking another mortgage?
When getting or assuming a mortgage you have to consider that at some future point it has to be paid back .. through a sale or a re-finance !

 

[MikeMcCrae]

At this point in time the advantage to a seller is if their mortgage was to be assumed then there would be no early pay out penalties. The saving could be substantial. This is something to keep in mind when doing up your offers.

 

[Nir]

What a great insight on the topic! thank you Thomas, Rob and Mike.

 

[Millions]

QUOTE (DaveRhydderch @ Apr 13 2010, 09:26 AM) You generally can assume the seller`s mortgage, BUT if that mortgage was ever insured, the seller remains on the hook for the mortgage. So even if the mortgage was insured 15 years ago and half of the principle has been paid off, the seller would remain on the hook if the buyer defaulted on the mortgage.

Generally sellers want someone to assume their mortgage so they don`t have to pay out fees for breaking their mortgage.

I am in the process of assuming my house as it was the only way to get a favorable price to break even. From what Genworth and Scotiabank (as well as investors) have told me, as long as my buyers qualify through Scotiabank, then I can get a letter from Genworth telling me that I am no longer reliable for the mortgage.

This makes sense but who knows. It`s always an odd thing to people it seems...any insight?

 

[RCrein]

QUOTE (MikeMcCrae @ Apr 19 2010, 04:22 PM) At this point in time the advantage to a seller is if their mortgage was to be assumed then there would be no early pay out penalties. The saving could be substantial. This is something to keep in mind when doing up your offers.

Looking at this from the buyer`s perspective, you will end up paying the penalty for the seller if you assume the mortage. The penalty, if it is of any size, will be based on rate differential; meaning the mortgage issuer doesn`t want to lose any income based on lower rates today than when the mortgage was issued. By assuming the mortgage, you are agreeing to pay a higher monthly payment than you would otjherwise pay using the current rates. You will however save the costs of getting a mortgage which can be significant.

 

[bizaro86]

QUOTE (RCrein @ Apr 21 2010, 07:43 PM) Looking at this from the buyer`s perspective, you will end up paying the penalty for the seller if you assume the mortage. The penalty, if it is of any size, will be based on rate differential; meaning the mortgage issuer doesn`t want to lose any income based on lower rates today than when the mortgage was issued. By assuming the mortgage, you are agreeing to pay a higher monthly payment than you would otjherwise pay using the current rates. You will however save the costs of getting a mortgage which can be significant.

It depends on whether the mortgage is a "good" one or not. If its under the current rates, you still need to pay the 3 months interest penalty. That would be a true win-win. The seller would save the 3 months penalty, and the buyer would get a below market rate.

This actually happened to me. I had a five year fixed mortgage, and I had to move for work. The bank it was with wouldn`t qualify me for the new (larger) mortgage on my new house in Calgary. I had to pay the 3 month interest penalty to discharge it, even though it was under market rates. (I got reimbursed from my employer, so it worked out). At the time I didn`t consider offering an assumable, although it would have been a creative win-win deal.

Michael

 

[cmattric]

Hi,
If you buy it with Agreement for Sale, you can assign that 150K as "sellers unpaid equity". When you close you either (this is usually when the mortgage matures) come up with the money or merge the balance as one big fat mortgage. Everybody will be happy.

If you buy it today transfering title and everything of course seller wants to get his money right away. This time again you have to come up with money or second mortgage.

Mehmet

 

[DaveRhydderch]

QUOTE (Millions @ Apr 21 2010, 10:35 AM) I am in the process of assuming my house as it was the only way to get a favorable price to break even. From what Genworth and Scotiabank (as well as investors) have told me, as long as my buyers qualify through Scotiabank, then I can get a letter from Genworth telling me that I am no longer reliable for the mortgage.

This makes sense but who knows. It`s always an odd thing to people it seems...any insight?


This is correct. However, just because the buyers would qualify through Scotiabank doesn`t me GE has to give you a release letter. When you sell, add in a seller`s clause to the effect of "Seller must obtain a a release letter issued by the lender upon the buyer qualifying for the mortgage".