Certified Residential Appraiser Practice Exam

What type of contract allows one party to take over the existing mortgage of another?

1. Mortgage Assumption

2. Subject-to Mortgage

3. Contract for Deed

4. Lease Purchase Agreement

The correct answer is: Mortgage Assumption

The type of contract that allows one party to take over the existing mortgage of another is known as a mortgage assumption. This arrangement enables the buyer to assume the seller's existing mortgage and take over the loan payments. The terms of the mortgage remain the same, such as the interest rate and payment schedule, and the lender typically must approve the assumption, particularly in cases where the mortgage has a due-on-sale clause. In a mortgage assumption, the new borrower is often able to benefit from potentially lower interest rates than what may be available if they were to obtain a new mortgage, especially if the original loan was secured at a favorable rate. This can be a beneficial arrangement in real estate transactions as it allows for a smoother and potentially more affordable transfer of property ownership. While other options like a subject-to mortgage, contract for deed, and lease purchase agreement relate to real estate transactions, they do not involve the direct assumption of the existing mortgage obligation as clearly as a mortgage assumption does. In a subject-to mortgage scenario, for example, the buyer takes over the property without officially assuming the loan, leaving the original borrower's name on the mortgage.