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Is a mortgage assumption a good idea?

You've just been offered what sounds like a great deal: For just a little money down, you can assume the mortgage on a piece of property you really love and become its owner.

Mortgage assumptions are a kind of owner-assisted financing that's coming back into vogue -- but they aren't right for everyone. Both buyers and sellers have to be cautious before they proceed with this type of real estate transaction.

The two types of mortgage assumptions

Simple mortgage assumptions are private agreements between the buyer and seller -- usually with little or no involvement from the bank that holds the mortgage. This is often the only way an assumption can happen if the buyer doesn't have the credit necessary to gain the bank's approval.

Mortgage novation is more formal. It involves a three-way agreement between the seller, the buyer and the bank. These are rare because many mortgage holders don't allow assumptions or require the new buyer to go through a credit check and underwriting.

The risks of mortgage assumption to buyer and seller

Absent mortgage novation, the risk to the seller is that they remain liable for the original loan even though the new buyer is on the title of the house. If the buyer defaults in the future, the seller may have significant financial and legal trouble as a result.

The risk of a mortgage assumption to the buyer is that the "great deal" could turn out to be anything but great. The buyer could be taking on a mortgage that's way over the property's current market price. They could also be subject to lending terms that hold unexpected surprises (like a balloon payment down the line).

None of this means that a mortgage assumption won't work for you -- whether you're the buyer or the seller. However, you should have an experienced attorney look over your proposed real estate transaction before you sign any papers.

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