Mortgage assumption - in need of experienced guidance

[Paul B.]

Hi All,

I'm looking for folks who have assumed a mortgage before and can help me figure this out. Ok. So here's the deal. I've got a mortgage assumption on a multifamily property (4plex). Straight-up assuming a loan is something I gather that is rare these days, and is usually only done on FHA. And that's what I'm looking at here. The questions in my mind have mostly to do with the mechanics of setting this transaction up properly and also protecting myself and the owner through proper documentation. I've previously used regular sale and purchase agreements for my transactions, but given this is an assumption, it's going to be a bit different. I'd like to figure out what that "assumption contract" needs to look like and what to watch out for in closing this. I've got an "assumption agreement" example that takes care of the mortgage assumption part of things, warranty deed, and release of liability to the owner, but in my mind leaves off a lot of things I would want to have in a contract for sale & purchase of this property.

In this case, I'm not sure what happens for insurance, taxes, rents, and interest up to "closing". Is all pro-rated as with a regular purchase agreement? Do we still split transfer and recording charges? It seems that would still need to be spelled out. Thoughts?

And I think the contract needs other items, such as stating inclusions/exclusions, non-encumbrance, permanently attached fixtures, property condition on possession, final inspection rights, warranties transfer, title search and transfer of title, and contingencies.

I understand that there may be a fee from the lender for the transaction in the neighborhood of 1%?

What contingencies are still valid in this kind of transaction? The ones that stand out for me are termite/WDO, and home inspection. I can't see any reason for an appraisal or financing contingency (I have the property next door, so I know what the appraisal will be). Is it a poor assumption to go into this as an "as-is" transaction? What has been your experience here? Have you made a home inspection a contingency on an assumption?

Lastly, I'd like to do my own escrows, versus what the current owner is doing now. with all rolled into the payment. Is it possible to modify the agreement between the bank and the owner when assumed by me to waive escrows? Does that need to be in the assumption agreement/contract? What happens to the PMI the owner is currently paying?

I think one "gotcha" here I can think of is to make sure the owner continues to pay the mortgage after we sign the contract. I sense "badness" if he does not.

Lots of questions. I'm sure someone has traveled this road before and can help. I leave it in your capable hands! Thanks a lot everyone --

[Dion DePaoli]

Cool stuff!

I have done a couple assumptions. FHA mortgage are indeed assumable. There is a 1% underwriting fee. Pretty standard.

You have all of this in your head you just need to regroup a little.

There is only 1 transaction here. You are buying the Subject Property. Let all concepts that deal with the real property such as your inspections, FF&E, warranties, title, etc as you would any other deal. Having an assumption does not or should not change any of that. You should have a proper Purchase and Sale agreement.

Now, how you are funding the transaction is you are assuming the mortgage. Don't make the assumption a transaction, it is not. The Seller has no control over the assumption and can not obligate the Mortgagee to do anything. In that sense, it is no different than you getting a loan to buy the property. Well...you are getting a loan to buy the property. It just so happens, it was the Seller's obligation first.

Generally speaking, you will step into the shoes of the current Seller as the new Borrower. If he has PMI, you will have PMI. If he escrows, you will escrow. Just like in any loan, escrows can be negotiated, PMI can not. Most FHA loans call for escrows to be collected by the Mortgagee, though as a practice, so you likely will have to continue this. PMI is insurance for Mortgagee incase of default, the Seller does not get any of that back. Depending on when the original loan was made, the PMI could be on for a mandated 5 years (new FHA policy) or until such time as the LTV is less than 80%.

One thing you may want to put on the contract is the financing contingency. It is presumed, and should be documented, that you are not buying the property unless the assumption is approved by the Mortgagee. That is your contingency, unless of course you plan to fund the transaction through cash or getting a new loan.

In terms of other vendor services such as appraisal, that is at the discretion of the Mortgagee as well. The Mortgagee will more than likely order an appraisal. They can also, based on that appraisal ask for principal pay down if the deal is not fitting inside their guidelines any longer. The Mortgagee controls all of this just like in a normal loan. The loan is re-underwritten, just like a normal new loan. Do not expect this to be a shortcut in that manner. I almost might say don't expect it to be any quicker either.

In terms of closing costs, it is all prorated on the HUD just like normal. You are still selling and buying real property, there will be a HUD. All fees and costs normal to all real property will be present. The difference here, compared to other financed purchases is that you will not be paying document stamps on the mortgage for recording. You will pay a modification or assumption recording fees linking the already recorded instrument to you as a borrower.

You should have a provision, perhaps through addendum, that the assumption is a contingency of this deal. In addition, the Seller agrees to keep current during the life of the contract all obligations under the current arrangement with the Seller and Mortgagee contained within the the Security Instrument and Note.

Let me repeat one more time for clarity. This is a normal purchase and sale and should be treated as such. The manner in which the purchase is being financed, you are just not accustomed to but it will for the most part be no different, faster, easier or structurally different than a 'normal' transaction with new financing being originated. You are purchasing the property Subject To Assumption of Mortgage approval and subject to all other standard real property diligence such as title, inspections, etc, etc.

Hope that helps.