Homeownership is a rite of passage, where the next generation buys their property and starts their independent life. This may seem like a distant dream because of rising house prices, but it was a reality for most only a few generations ago. Some folks even took over farms and businesses that had been in the family for generations, and this succession kept families close and interests intact.
Fast-forward to today, and the next generation is longing for their piece of the real estate pie. Fortunately, many parents are handing their homes, cottages, and rental properties over to their kids so they can downsize and enjoy their retirement.
This can be a complicated process unless you seek guidance and understanding of how to assume a mortgage and any financial implications that come with it. To guide you through it, here are some tips from your parents for taking over a mortgage.
Understand What Taking Over Means
When taking over your parent's mortgage, you must understand the process and financing arrangement. You are assuming their existing mortgage with the payment terms and interest rate.
You must qualify for the mortgages despite not getting a new one. The lending institution needs to know that you can make the payments and have a steady income source. This means that as nice as your parents are, you must qualify using the bank's criteria for assuming the mortgage. There will also be closing costs with the transfer, so be prepared for that.
Make Sure You Have the Down Payment
In a traditional mortgage, you get approved for a loan amount and then make a down payment to the lender. This is usually more than 20%. You must work with CMHC in Canada if the down payment is less. An assumed mortgage works differently. You take over an existing loan, payment plan, and interest rate. Your parents can port their mortgage to the new place if they want a new home. But assuming the mortgage means they won't need a new mortgage. They will still have equity in their current home.
The down payment on an assumed mortgage is based on the home's equity. For example, if the home is worth $500,000 and the remaining mortgage is $300,000, the down payment is $200,000, representing the home's equity.
If you're doing this with someone who is not a family member, you need to manage this through a lump payment, another loan, or a second mortgage. This means you need to qualify for it and handle both payments. Your parents may also need that money. Unless you set up a personal agreement or they gift you the equity, you would have to pay them.
Assess the Property
In some cases, assuming a mortgage involves a small down payment as there is not much equity built up in the home since your parents purchased it. You will assume the mortgage and the home's value may be the same as the loan.
This is a potential concern because you don't want to buy a property that is not worth the amount you are assuming, so it is best to get a home inspection. Be upfront with your parents so they understand that you protect the asset and their interest in it. You may not want to proceed if the inspection comes back with major issues.
Also, the home may be sound in a downturned economy, but the values are not there. Get an appraisal to see what the property is worth. This, too, can be a bad investment, and you may want to reconsider your plans to take over the mortgage.
Make Sure You Satisfy the Mortgage
Depending on the lender, some assumable mortgages still hold the original owner liable if the loan is defaulted on. This could be for the life of the mortgage or a specific period, like a year. This puts a considerable burden on you and your parents.
Nobody wants to default on a mortgage, but it happens, and you should never put your parents in a liability position. Make sure to work with a lender that frees the financial obligations from them, and you assume the entire burner of debt.
Get Favourable Rates
The main benefit of assuming a mortgage is a favourable interest rate, but you still want to be responsible for home ownership and fulfill your obligation to the bank. This property may be a gift from your parents, along with any existing equity, so cherish that windfall and meet the obligations so you reap the benefits of it in the future.
This financial transaction needs to be taken seriously, so use these tips when taking over a mortgage from your parents. In the end, what is most important is the preservation of the family connection, so make sure everyone understands the agreement and is happy with the arrangement. Then you can enjoy your new home and see your parents start the next financial chapter in their lives.
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