Can assuming a mortgage loan be a rare blessing or a mere scam from the seller. Will I also gain the equity?

Question

I am being offered an oppurtunity to assume a home loan on a older but remoldeled 4br/2bth home. The owner says he's not making any profit off of it due to the raise in propert taxes and home owner's insurance. I feel that its a great chance to own 11,000sq/ft of land and property, but I need to know the downfalls of assuming a mortgage. Does the home still have to be inspected? I think the house has termite issues since its older and has a unsealed crawspace. How will I know I'm not merely assuming someone elses problems? What would protect me from being scamed? Is this really a blessing? Maybe maybe not?

Answer 1

If you can in fact assume a mortgage, it could be an advantage. But there are problems:
- Most modern mortgages are, by their terms, NOT assumable. Examine the mortgage documents closely to see whether assumption is permitted. Usually, the lender's permission is required.
- Many older mortgages were assumable, but the balances on these are so small that they are not useful.
- Even if the mortgage IS assumable, the terms may not be appropriate. It is nonsense to assume a mortgage at 7.5% when the going rate for a new one is 6.25%.
Irrespective of whether a mortgage is assumed or not, your equity will be the difference between what the house is worth (which has NOTHING to do with what you pay for it) and the total amount of financing on it. If you happen to pay for a house exactly what is worth (which is nonsense, as there is no such thing as an exact value), the amount of your equity equals the amount of your down payment (ignoring closing costs). Do this: take the proposed paperwork to your banker, or to a trusted real estate broker, and get comments.

Answer 2

1. Do your homework
2. Get an appraisal
3. Get an inspection
4. Get a professional (attorney) to handle the paperwork

and you'll be fine.

Property taxes has nothing to do with profit unless he is behind so much that what he owes combined with his current mortgage exceeds the value of the home. At any rate, he is responsible for taxes for as long as he lived there (in california anyway)

The pros of assuming a mortgage is that he may have paid down the principal and left you with some equity. If he hasn't and the place is upside down, you might as well get a new loan and make him an offer and save yourself the possibility of getting into trouble.