Assumption clause Definition
What is a hypothesis clause?
A care clause is a provision in a mortgage contract that allows the seller of a home to transfer responsibility for the existing mortgage to the buyer of the property. In other words, the new owner assumes the existing mortgage. The buyer must generally meet credit and other requirements.
Key points to remember
- A take-over clause allows the seller of a home to transfer responsibility for an existing mortgage to the buyer of the property.
- The new buyer must meet credit and other qualifications.
- Assumption clauses are attractive when the interest rate on the current mortgage is lower than current rates.
- These clauses can also help buyers avoid closing costs.
- However, for most homeowners, the benefits of an assumption clause are moot since conventional mortgages generally prohibit this practice.
How a hypothesis clause works
If the interest rate on an existing mortgage is lower than current market rates, a assumption clause becomes an attractive selling point. Besides, the buyer can avoid many closing costs, although there are fees involved in the assumptions. Some of the costs will include a title search, document stamps and taxes.
For most homeowners, the benefits of an assumption clause are moot since conventional mortgages generally prohibit this practice. Banks frown on assumption clauses because they take out mortgages based on the creditworthiness of the original borrower, not an unknown subsequent buyer.
The repayment capacity of the new owner can be difficult to assess and the bank may be reluctant to assume its risk. Moreover, even if a bank approved the creditworthiness of a new borrower, it would lose the down payment and closing costs incurred with a brand new mortgage.
Since it is seldom in a bank’s best interest to allow assumptions, most mortgages include a liability clause, which requires repayment of the balance when the property is sold. The bank will sign its privilege until the mortgage is repaid, making the sale impossible.
However, assumption clauses are standard in government guaranteed mortgages of the Federal Housing Administration (FHA), the Veterans Administration (VIRGINIA), and the US Department of Agriculture (USDA). The new owner must still meet credit and eligibility standards.
Example of a hypothesis clause
Imagine someone who wants to take out a mortgage from a seller who has a 30-year, $ 240,000 3.5% mortgage on which they have made payments for five years. The remaining balance, including interest, is approximately $ 323,300, and 25 years remain on the original note.
Assuming the current market interest rate is 4%, and the new buyer has taken out a 30-year fixed rate mortgage on the same loan of $ 240,000, the balance, with interest, due at the end of the period. this period, would be approximately $ 412,500. In addition, the new purchaser will have to remit a lump sum to the financing institution.
By assuming the seller’s existing mortgage, the buyer would save approximately $ 89,000 over the life of the loan. In addition, there are five years less payment obligation with the assumption loan. Any lump sum payment would be made to the seller to make up for the equity he has built up in the house. Plus, the buyer will avoid thousands of dollars in closing costs.