Assumable Mortgage Explained

The purchase of a new home can be financed in a variety of ways, and potential buyers have a lot of options available to them. 

When there are so many different kinds of mortgages available to pick from – all of which present particular advantages that vary depending on the needs that you have as a borrower – it can be challenging to select the sort of loan that is most appropriate for your situation.

An assumable mortgage is one of the many types of mortgages that prospective purchasers might want to take into consideration. Let’s investigate this possible method of borrowing, how it operates, and whether or not it’s the best choice for you.

What Exactly Is an Assumable Mortgage?

With an assumable mortgage, a potential buyer can locate a home they are interested in purchasing and take over the existing home loan being held by the seller. This eliminates the need for the potential buyer to apply for a new mortgage.

This indicates that the remaining balance, interest rate on the mortgage, payback duration, and other loan parameters remain the same; nevertheless, the liability for the debt is passed from the seller to the buyer.

There is always a certain percentage of prospective buyers of homes who run the threat of being squeezed out of the market whenever there is an increase in the average rate of interest for mortgages. 

Mortgage rates are currently at an all-time high and are expected to continue climbing, creating a challenging environment for many individuals who harbor aspirations of one day becoming a homeowner.

As these buyers look for homes, the ability to incur lower interest rates thanks to loan assumption could be a powerful incentive for them to make a purchase. This is because loan assumption would permit them to incur lower interest rates despite the fact that the housing market is becoming more expensive.

How Does an Assumable Mortgage Work?

The only difference between an assumable mortgage and a standard mortgage is that the buyer must obtain financing from the lender chosen by the seller. A mortgage that can be assumed must be approved by the lending institution. 

Without permission, sellers risk having to fork over the whole balance right away. Sellers should also be aware that buyer payment defaults might have a negative effect on buyer credit.

Buyers can save hundreds of dollars by avoiding the cost of an appraisal in these transactions. If a buyer is concerned about the property’s condition, they should still have a professional examination performed. The seller’s obligation to make mortgage payments terminates upon the closing of the sale.

Which Mortgages Can Be Assumed?

In principle, a clause allowing the mortgage to be assumed may be included in any sort of home loan. Nevertheless, in most cases, this characteristic is only present in the following three kinds of loans:

FHA Loans

Before you decide to assume an FHA loan, familiarize yourself with the following information. Both the buyer and the seller must meet certain requirements for a newer FHA loan in order for the mortgage to be assumed. 

Both the seller and the buyer are required to go through the normal FHA loan application process. The seller must occupy the property as their principal residence for a minimum period of time.

Buyers can breathe easy knowing that the down payment on an FHA loan is only 3.5%, making this program a great choice for those who are buying their first home. The minimum credit score for an FHA loan is 580, so even people with less-than-perfect credit have a chance of qualifying.

Get your credit in order before applying for a mortgage, so you can present yourself in the best light possible.

VA Loans

Those who have served their country honorably and meet other requirements can apply for a VA loan, which is guaranteed by the U.S. Department of Veterans Affairs. The buyer does not need to be a current or former member of the armed forces in order to apply for the VA loan assumption program.

The Regional VA Loan Center’s approval may be required as well, depending on the specifics of the loan arrangement, which could add some time to the loan closing process.

Only very rarely will a buyer come across a VA loan that was closed before March 1, 1988, and is therefore freely assumable. If a buyer in this situation fails to make their mortgage payments on schedule, the seller may still be responsible for doing so. 

Nevertheless, prospective purchasers should exercise caution before taking on mortgages that were established in the late 1980s, as they typically carry higher interest rates.

USDA Loans

A minimum credit score of 620 is required for qualification for a USDA loan. You must also be within the allowed salary range and physically present. 

It’s important to keep in mind that the rate and terms of a USDA loan are usually changed when it’s assumed, but in certain situations, such as when a loan is transferred within a family, the rate and terms can remain the same and no eligibility requirements need to be met.

How to Qualify for an Assumable Mortgage

A client must be “creditworthy” in order to assume a mortgage insured by the Veterans Affairs (VA), the Federal Housing Administration (FHA), or the United States Department of Agriculture (USDA). 

The borrower’s debt-to-income (DTI) ratio also needs to be below the lender’s threshold, and they need to have a credit score that meets the minimum requirement. In addition, there is a minimum required FICO® Score for each type of loan:

VA Loans – Although there is no VA-mandated minimum credit score, most private lenders require a 620 score for approval.

FHA Loans – A buyer’s FICO® Score needs to be 580 or above in order to qualify for an FHA mortgage.

USDA Loans – To qualify for taking over a USDA mortgage loan, a buyer’s FICO® Score needs to be 640 or greater.

Assumable Mortgage: Pros and Cons

When weighing the benefits and drawbacks of assuming responsibility for an existing mortgage, it is important to take into account any new expenses, documentation, and processing times that may be required.

Even if it might make sense to steer clear of higher interest rates offered by the seller’s creditor, it might be to your advantage to look around at your other options before making any final commitments.

In order to determine whether or not taking out a loan that can be assumed by another party is the best option, the following information is necessary.

Pros

• You can increase the desirability of your home to potential purchasers. A buyer may be more interested in purchasing your property even if you have a small amount of equity in it provided that the interest rate on your current mortgage is low.

• In most cases, you won’t need to get an appraisal. When taking over an existing mortgage, the buyer typically is not obliged to pay for an appraisal. This not only makes it possible to close the deal more quickly, but it also spares the buyer the cost of the appraisal, which might be several thousand dollars. 
  
  However, as a buyer, you should still consider getting an appraisal that is separate from the one ordered by the lender in order to reduce the likelihood of making an error in the amount that you pay for the property.

• If you are a buyer, you can end up saving money. A reduction in the buyer’s overall interest expense over the course of their loan could save them thousands of dollars. 
  
  In addition, because buyers do not have to pay for an appraisal, they have the option of keeping the few hundred dollars they would have paid for it upfront rather than paying the additional fees.

Cons

• You are only able to borrow from the current lender. If you want to take over an existing mortgage, you are required to submit an application for the loan and fulfill all of the lender’s requirements just as if the loan were being generated for the first time. 

The assumption is impossible if the lender does not give their permission. Because of this restriction, your choice of lender is limited to the loan servicer that the seller uses.

• There is a possibility that you are still liable for the loan. There are times when looking at things from a different perspective results in a more favorable outcome. When it comes to assumable mortgages, sellers frequently incur additional risks, and this is especially true when they allow purchasers to assume VA home loans. 
  
  If a buyer assumes a mortgage that is freely assumable and then passes ownership to a third party without the seller’s knowledge, the vendors may still be accountable for making up any missed mortgage installments that the new homeowner incurs. 
  
  There is a greater potential for buyers to default on their payments if the seller is ignorant of the transaction.

• You could be required to put down a significant initial deposit. It’s possible that the seller will require a significant down payment from you if they have a lot of equity in the property.

• There is a possibility of forfeiting one’s entitlement. Sellers who have assumed VA loans run the risk of losing their entitlement entirely if the new owner fails on the loan. This might have a negative impact on the sellers’ ability to obtain prospective VA home loans. 
  
  In order to prevent something like this from occurring, sellers are required to get a release of obligation following the closing of their property and present certification to the Department of Veterans Affairs in order to have their entitlement restored.

How Do You Know If Your Mortgage Is Assumable?

The process of taking over an existing mortgage is quite similar to that of purchasing a new property; you should go into it with your preparations complete. Examine the terms of your mortgage contract for a provision labeled “assumption” to determine whether or not your loan can be taken over by another party. 

Because of this clause, you are able to hand over the responsibilities associated with your mortgage to another person. Bear in mind that the new borrower will normally be required to adhere to the loan’s eligibility standards if the assumption of the loan is permitted by the mortgage lender.

Is an Assumable Mortgage Worth It?

Assumable mortgages have certain perks, but they also have some downsides and might not be the best option for everyone. 

Consider your financial situation, the amount of money you have saved for a down payment, and the interest rates that are currently available on the market when you are trying to determine whether or not an assumable mortgage is the best option for your requirements. 

An assumable mortgage could be a viable option if you are unsure of your ability to secure a cheap interest rate on your own, or if current market rates are much larger than the rate on the mortgage you are considering taking over.

New mortgage financing may be preferable if the interest rate is attractive or if you don’t have enough cash on hand to cover the seller’s equity.

Knowing what an assumable mortgage is and how it works can give you an advantage when searching for a great real estate deal, so it’s always a good idea to educate yourself on the subject.

Bottom Line

Instead of getting a new mortgage, a homebuyer can take over the existing mortgage that the seller has on the property thanks to an option known as an assumable mortgage. Mortgages that can be taken over by a new borrower offer the potential for a borrower to take leverage of a cheaper interest rate than what is currently offered by the market.

However, not everyone is a good candidate for an assumable mortgage. They are only accessible on a limited number of loans that are guaranteed by the government, and they come with a number of other potential repercussions that might make them prohibitively expensive.