Mortgage Assumption Clause

Mortgage Assumption Clause
A Mortgage Assumption Clause is a provision within a mortgage agreement that allows a borrower to transfer their existing mortgage obligation to another party. This means that the new borrower can take over the responsibilities of the mortgage, including the payment of principal and interest, as well as any associated conditions set forth in the original loan contract.

Typically, the Mortgage Assumption Clause is beneficial in situations where the existing mortgage has a lower interest rate than current market rates, making it attractive for the new borrower to assume the mortgage rather than taking out a new loan at a higher rate. However, the lender must usually approve the assumption, ensuring that the new borrower meets their credit and financial criteria.

There are generally two types of assumptions: "qualifying" and "non-qualifying." In a qualifying assumption, the new borrower must go through a credit check and approval process by the lender, who will assess the borrower’s financial situation. In contrast, a non-qualifying assumption allows the new borrower to take over the mortgage without this approval, although the original borrower remains liable for the loan, creating potential risks for the lender.

For example, if John sells his home to Sarah and the mortgage includes a Mortgage Assumption Clause, Sarah can take over John’s mortgage payments. If it’s a qualifying assumption, Sarah would need to apply to the lender, and if approved, she would then be responsible for the mortgage going forward, releasing John from further obligations.