Does Assuming a Mortgage Hurt My Credit?

When interest rates spiked during the second half of the 20th century, homebuyers often looked for assumable home mortgages. If the seller was paying less than the current interest rate, and the loan was assumable, it meant significant monthly savings for the buyer. After interest rates began to drop, and loans were easier to obtain, many buyers no longer had a reason to seek out assumable mortgages. While they still exist, they are not widely used by buyers.

A mortgage is a lien against a piece of real estate to secure a loan against the property. The lender holds the mortgage or lien. The lien gives the lender the right to foreclose on the property should the borrower default. Not all property loans involve mortgage liens. Some states use a deed of trust system, which is a three-party system involving the trustor (borrower), beneficiary (lender) and trustee, who holds naked title on the property during the loan term and represents the interests of the beneficiary.

While the lender is the party that holds the mortgage, not the borrower, the term "assuming a mortgage" applies to someone assuming the borrower's responsibility to the lender holding the mortgage. The party assuming the loan might pay the original borrower a down payment, and then assume the property debt and pay the mortgage payments.

Reasons for assuming a mortgage include lower loan fees and possibly lower interest rates. Yet, it does not mean the new borrower does not have to qualify for the loan. Typically, the new borrower must quality for the loan before assuming the mortgage responsibility. In some situations the lender does not release the first borrower of responsibility, and should the party assuming the loan default, the lender will hold the original borrower responsible for the debt.

Assuming a mortgage affects your credit in the same way as obtaining a brand-new home loan. When the lender checks your credit during the qualification process, the creditor's inquiry goes against your credit scores, as do all inquires by potential creditors. Assuming the mortgage responsibility hurts your credit in that it represents a chunk of your outstanding debt. How you manage that obligation, in timely payments and honoring your loan agreement, raises or lowers your credit scores. If you make late payments or default on your loan, your credit scores drop. If you make all your payments on time, your credit scores rise.

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