Options for a Home Seller – Part 3

Part 3: Mortgage Assumption/Subject-to

Part 3 of an 8 part series -

Goal: To educate a home seller on the options for selling their home.

“What are my options?”

This is one of the most common questions I receive from home sellers, and it’s a valid question. How do you, as a home seller, expect to make an informed, intelligent selling decision without knowing all the options you have available? The short answer is you can’t. But don’t fret! The goal of this article is to clarify and explain all the options you (home seller) have when liquidating your property.

Below is an outline of the options at your disposal (in no particular order):

1. Traditional Listing
2. Net Listing
3. Mortgage Assumption
4. Cash sale (off market)
5. Owner financing
6. Short sale
7. For Sale by Owner (FSBO)
8. Foreclosure

Now that you know all eight options let’s dive into more detail describing each option and cover a few pros and cons.

3. Mortgage Assumption/Subject-to – A mortgage assumption occurs when the buyer (assumer) makes payments to the loan on you (the sellers) behalf, during which time the loan will stay in your name and appear on your credit report until the loan is either paid off or refinanced. The buyer (assumer) is essentially relieving you of your housing responsibilities including taxes, insurance, maintenance and repairs. The transaction can be completed in less than a week and is a simple addendum to the standard TREC contract.

• Pros
  • Fast. The transaction can be completed in less than a week with a simple Loan Assumption Addendum added to the standard TREC purchase agreement contract.
  • Save or improve your credit. If you are behind on your payments having a buyer assume the loan, bring it current and start making payments on your behalf will actually save (and over time improve) your credit.
  • Avoid foreclosure. If you are facing foreclosure this can be a perfect solution. The buyer (assumer) can stop the foreclosure process in days, alleviating your stress and preventing its undesirable consequences.
  • Can sell with little equity. Have you tried to sell your house but don’t have enough equity to pay the realtors? No need to worry, since there are no costly commissions (~6% of the sales price) you can complete a loan assumption with little to no equity.
  • Flexible close date. The assumption can be completed extremely quickly, as mentioned above, but it doesn’t have to be. If you require or would like a later close date, most buyers (assumers) are flexible on the timeframe.
• Cons
  • Still responsible for mortgage. The mortgage is still in your (sellers) name, meaning at the end of the day you are responsible for ensuring the mortgage payments are made. The buyer (assumer) is making the payments on your behalf. It’s like adding someone to your credit card, they should be making the payment every month, but at the end of the day it’s your credit that's on the line.
  • Mortgage stays on credit report. Since the mortgage is still your responsibility, the buyer (assumer) can help your credit or hurt it. If the buyer (assumer) makes payments on time, your credit will go up, if they don’t, your credit will be affected.
  • Buyer (assumer) could not pay. As mentioned above, the buyer (assumer) is taking over payments for you, leaving you at the end of the day to ensure the payments are made. If the buyer (assumer) doesn’t pay then your credit will be affected and you will be stuck with a mortgage that’s behind. A way to mitigate this risk is to have the buyer (assumer) give you some cash at closing, complete a rehab, or send you a copy of the monthly mortgage statements.
  • Due on sale clause. In almost every mortgage there is a clause that states the bank can call the entire loan balance due anytime the property changes owners. What’s this mean to you as the seller? The entire loan balance may have to be paid, meaning you need to either come up with the funds or refinance. Good news, this almost never happens.

Continue with Option 4 of our 8 Part series!