What is an assumable mortgage?
An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a buyer. This means the remaining balance, mortgage interest rate, repayment period and other loan terms stay the same, but the responsibility for the debt is transferred to the buyer. Different types of loans can qualify as assumable mortgages, though there are some special considerations to keep in mind.
When interest rates rise, an assumable mortgage is attractive to a buyer who takes on an existing loan with a lower rate.
USDA, FHA, and VA loans are assumable when certain criteria are met. Most conventional loans are not assumable.
The buyer need not be a military member to assume a VA loan.
Buyers must still qualify for the mortgage to assume it.
Understanding Assumable Mortgages
If the homeowner has an assumable loan and decides to sell their home later, they may be able to transfer their mortgage to the homebuyer.
An assumable mortgage allows a homebuyer to assume the current principal balance, interest rate, repayment period, and any other contractual terms of the seller’s mortgage. Rather than obtaining a new home loan from a lender.
If current interest rates are higher than the interest rate on the assumable loan, there could be a cost-saving advantage. In a period of rising interest rates, the cost of borrowing also increases. Therefore, an assumable mortgage is likely to have a lower interest rate, an attractive feature to buyers.
With today’s higher interest rates, Loan assumption can be a powerful enticement for buyers as they shop for houses, because it would allow them to pay lower interest rates even as the housing market becomes more expensive. Sellers may be able to use this option to make their home more marketable to sell.
What Types of Loans are assumable?
FHA loans
FHA loans are assumable when both transacting parties meet the requirements for the assumption. The seller’s lender will verify that the buyer meets the loan qualifications. If approved, the mortgage will be assumed by the buyer.
VA loans
To assume a VA loan, the buyer need not be a member of the military to qualify. Although, the lender and the regional VA loan office will need to approve the buyer for the loan assumption. For VA Loans there were originated after March 1, 1988, borrowers must meet additional rules and qualification requirements.
Advantages and Disadvantages of Assumable Mortgages
While it may make sense to avoid higher interest rates through the seller’s lender, it may be beneficial to shop around before committing to anything officially. Here’s what you need to know to decide if taking on an assumable loan is the right choice.
The advantages of acquiring an assumable mortgage in a high-interest rate environment are limited to the amount of existing mortgage balance on the loan or the home equity. For example, if a buyer is purchasing a home for $650,000 and the seller’s assumable mortgage only has a balance of $510,000, the buyer will need to make a down payment of $140,000 to cover the difference. Or the buyer will need a separate mortgage to secure the additional funds.
A disadvantage is when the home’s purchase price exceeds the mortgage balance by a significant amount, requiring the buyer to obtain a new mortgage. Depending on the buyer’s credit profile and current rates, the interest rate may be considerably higher than the assumed loan.
Pros
- Buyers may get rates lower than current market rates
- Buyers may not have to secure new lines of credit
- Long-term savings because you are borrowing at a lower interest rate over a shorter period of time than a new loan
- Sellers can market their home with an attractive assumable loan with favorable terms
Cons
- Buyers may need substantial down payments when the equity is high
- Lenders may not cooperate when a second mortgage is needed
- The process may cause unacceptable delays to the transaction
- There may be restrictions on removing mortgage insurance
- If not done properly, the credit worthiness of the seller may be at risk in the event of a buyer default
Assumable Mortgage Transfer Approval
To qualify for a mortgage assumption, you first need to confirm that the house you want to buy is eligible for assumption. Second, the lender of the original mortgage must approve the mortgage. The homebuyer must apply for the assumable loan and meet the lender’s requirements, such as having sufficient assets and being creditworthy, as typical in new home mortgages.
If approved, the title of the property is transferred to the buyer who makes the required monthly repayments to the bank.
For their protection, the seller must release their liability in writing at the time of assumption, and the lender must approve the release request releasing the seller of all liabilities from the loan.
The Bottom Line
An assumable mortgage may be attractive to buyers when current mortgage rates are high and because closing costs are considerably lower than those associated with traditional mortgages. Mortgage assumption can be a valuable option for those looking for the possibility of a lower interest rate and more attractive terms that a new home loan. Remember that the buyer must still qualify with the agency and lender. The StreicherTeam is here to help you navigate through this process and to help you make a solid and confident financing decision.