Assuming a Vendors existing mortgage

[Seankm21]

I am looking at a couple of fourplex properties and the vendor wishes the the buyer assume the existing mortgage on the property(ies). I have a couple of questions with regards to this.

First off why would the vendor want that? What is behind his curtain?

Second, what are the pros and cons to doing this?

Third, (ok sorry it was more than a couple), what kind of contract clauses should be in any contract to assume the mortgage to protect myself and lesson any additional risk that may be attached to doing this?

Finally, what is the banks position on having the mortgage assumed by someone else? What can they do in this case?

Thanks,

Sean McGleish

 

[Thomas Beyer]

In most cases of mortgage assumption, the seller wishes to avoid the payout penalty, which can be several ten's of thousands of $s if you discharge a mortgage before it matures.



The interest rate might be higher than today's, and as such you need to reflect that in your purchase price.



Example: seller wants $240,000 for his 4-plex, with an assumable $180,000 mortgage at 6%. 3 years left on the mortgage. However, today's rate might be 3%. Thus you "overpay" by 3 years * (6% - 3%) * $180,000 = $16,200 in higher interest cost for 3 years. Thus, you have to decide if this premium is justified in light of the purchase price.



Banks have to approve the assumption, although many banks don't care if you assume a mortgage that is higher than today's market. Technically, the mortgage is then in default i.e. it can be called by the bank, but that is rarely done if the payments are current and the interest rate is higher than today's rate.



In addition, in a commercial mortgage there may be personal guarantees involved. The seller usually wants his personal guarantee off the mortgage, or an indemnity agreement from you, the new owner in case you default, and the bank comes back to he seller to collect.



Sometimes the ONLY way to buy is to assume the mortgage. It might be a condition of purchase. That depends on the interest rate, the length of time left to maturity, the price, the market, the competition and the motivation of both the buyer and the seller.

 

[Seankm21]

Thanks Thomas. That is helpful.



What are the legal ramifications of assuming the mortgage? How is the payment of the mortgage handled (who is actually making the payment Am I paying seller and he pays mortgage or do I actually make payment to bank for seller)



Who gets profits from mortgage being paid down if it is assumed?

 

[Thomas Beyer]

You as the new owner pay mortgage and keep all equity. The second option is called an agreement for sale. The building is not transferred to you yet, you just agree to buy it in the future, usually when the mortgage matures. That is a senior step. That agreement for sale contract will specify who pays the mortgage and who gets the equity. It is also called a wrap mortgage, in that you wrap your property interest around the existing first mortgage.