When you assume a mortgage, you take over the payments on an existing loan from the current owner. This can be a great way to finance a home without having to go through the hassle (and expense) of getting approved for a new loan yourself. However, there are some things you should be aware of before taking over someone else’s debt.
The homebuying process can be stressful, especially when there are so many different types of mortgages to choose from. One way to make this process more enjoyable is by considering an assumable mortgage.
With an assumable mortgage, you take over the seller’s loan when you purchase the home. This saves you the hassle of qualifying for a brand new loan. However, there are still some special considerations to keep in mind.
Read on to figure out whether assuming a mortgage could be an option for you.
What is an assumable mortgage?
To put it simply, an assumable mortgage loan is a type of financing arrangement that allows a homebuyer to take over the mortgage of the current seller. This means that instead of obtaining a new loan, the buyer assumes the seller’s remaining debt and makes monthly mortgage payments to the lender.
However, there are a few things to keep in mind with assumable mortgages.
- Not all mortgages are assumable.
- Even if a mortgage is assumable, the lender may require the new borrower to go through a credit check or other approval process.
- The new borrower would be responsible for any remaining balance on the mortgage, as well as any fees associated with the assumption.
What types of mortgages are assumable?
Many prospective homebuyers may assume that all kinds of mortgages can be transferred to another party. However, this is not the case. In fact, only certain types of mortgages have this feature.
A VA Loan is a mortgage loan guaranteed by the United States Department of Veterans Affairs. The program is available to veterans, active-duty service members, and surviving spouses.
One of the main advantages of this loan is that it’s assumable. Moreover, even if the new borrower isn’t able to qualify for a VA loan themselves, they are still able to take over the terms of an existing VA loan.
An FHA loan is a government-backed mortgage that is insured by the Federal Housing Administration (FHA). It’s typically offered to borrowers who are unable to make a large down payment or who have a low credit score. According to the Department of Housing and Urban Development (HUD), all FHA loans are assumable.
To successfully assume an FHA loan, you’ll need to meet the minimum FHA loan requirements. These include having a credit score of at least 580 and being able to afford a down payment of at least 3.5%.
USDA loans are issued by the U.S. Department of Agriculture (USDA) guaranteed loan program. They provide low-interest financing and no down payment in designated areas for rural economic development and housing. Like other government-backed mortgages, USDA loans are assumable.
However, the approval process is not as simple as telling the seller that you want to take over the loan. Lenders will require that you meet their credit score benchmark and that the house falls within USDA’s parameters.
Keep in mind that conventional mortgages backed by Fannie Mae and Freddie Mac are typically not assumable, except for adjustable-rate mortgages (ARMs).
How to assume a mortgage
Here are some steps you’ll need to go through to take over the mortgage from the seller.
- Confirm that the mortgage is an assumable loan. Mortgage assumption allows you to take over someone else’s home loan only if the mortgage is actually assumable. Some loans, such as conventional mortgages, have restrictions against being transferred to a third party. Before proceeding, make sure to check with the lender and the seller.
- Qualify with the lender. Qualifying for an assumable mortgage is the same procedure as when you would qualify for any other mortgage. This means you’ll need to go through the application process to meet the lender’s requirements before getting approved. Usually, lenders will want you to meet their benchmarks for debt-to-income ratio, credit score, income, etc.
- Close and sign liability release. Lastly, if the lender approves the transfer, you’ll most likely need to fill out paperwork just as you would when closing other types of home loans. The lender might ask you to sign a release of liability to confirm that the seller is no longer responsible for liabilities associated with the mortgage.
Pros and cons of assuming a mortgage
Just like any other financing method, assuming a mortgage has its benefits and drawbacks. As a homebuyer, make sure to carefully weigh your options before taking over the seller’s existing loan.
Here is a list of the benefits and the drawbacks to consider.
- Save on appraisal fees. Appraisals are usually not required when you’re taking over a mortgage from the seller. This can save you a few hundred dollars on appraisal fees and lower your overall closing costs.
- More desirable home. If you’re a seller, an assumable mortgage can be a valuable marketing tool to make your home more desirable to buyers. It can be especially helpful if interest rates have gone up since you took out your mortgage, as the buyer can continue paying the same lower interest rate. Also, it typically costs less to assume a loan than to get a new mortgage loan. This can save buyers quite a bit of money and make your listing even more appealing.
- Potentially lower interest rates. One of the main advantages of assumable mortgages is that buyers may secure lower interest rates if those rates have risen since the mortgage was drafted. For example, if a buyer assumes a mortgage with an interest rate of 4.25% while the current interest rate is 6.75%, this can save the buyer thousands of dollars over the repayment period.
- May need a larger down payment. If you take over a mortgage when the seller still has a lot of equity in the home, you might have to pay a larger down payment. Here’s why: Let’s say that the seller still owes $100,000 on the mortgage after 8 years, but the home value has risen to $300,000 over that timeframe. This means that you, as the buyer, would have to come up with the difference—which is $200,000. When this happens, it’s likely that you’ll need to take out another mortgage. This could increase your risk of default, especially if the interest rate is high.
- Limited to the current lender. Because you’re stepping into the seller’s mortgage, you must still meet the current lender’s requirements as if the loan were newly originated. This means you won’t have the option to choose a loan servicer whom you prefer. Instead, you’re limited to the seller’s lender.
- Seller may still be responsible for the debt. If you’re the seller, you can still be responsible for the remaining debt payments after it’s assumed by the buyer or a third party. However, this can be avoided if the mortgage lender approves a release request that releases you from all liabilities associated with the loan.
Is assuming a mortgage a good idea?
Before assuming a mortgage, make sure that you know what you’re getting into and that it makes financial sense for you. It could be a great way to save money on interest payments and finance a home you otherwise couldn’t afford. However, there are disadvantages associated with it as well.
Overall, whether assuming a mortgage is a good idea or not depends on many factors. This includes your financial situation, credit score, the seller’s home equity, the amount of debt you currently have, etc. Some people may find that assuming a mortgage is a wise way to get ahead financially, while others may find that it creates more financial burden than they can handle.
The best way to determine if assuming a mortgage is right for you is to speak with a financial advisor who can help you assess your specific situation.
Can a family member assume a mortgage?
It depends. For government-backed loans such as VA loans, the new homeowner typically doesn’t need to undergo a credit or income check to qualify. This means that your family member should be able to assume the mortgage without any problems.
However, the majority of assumable mortgages will require your relative to go through a qualification process. If your family member isn’t able to provide evidence showing financial stability, lenders might not allow the transfer.
How do I take over my deceased parents’ mortgage?
Assuming a mortgage from a relative who has passed away is a different story. Under the Garn-St. Germain Depository Institutions Act of 1982, you won’t need to go through the process of qualifying for a mortgage assumption. Simply notify your deceased parent’s lender that you’re inheriting the home.
As long as all regular loan payments are made and you’re living in the inherited home, the lender must permit the mortgage assumption.
Can you use assumable mortgages to buy foreclosed homes with no down payment?
Yes, it is possible to buy distressed or foreclosed homes without cash in certain cases. This article provides an in-depth analysis of how to buy foreclosed homes with no money.
- An assumable mortgage is a type of financing arrangement where the current property owner is able to transfer the mortgage to the new buyer.
- Government-backed mortgages such as FHA, VA, and USDA loans will generally allow for assumptions. Whereas conventional loans, backed by Fannie Mae and Freddie Mac, will not, with the exception of adjustable-rate mortgages.
- As a buyer, you can potentially save on appraisal fees and interest payments by assuming a mortgage. However, you’ll need the consent of the seller’s current lender. You might even need to take out a second mortgage if the seller has a lot of equity in the home.
- As a seller, having an assumable mortgage can make your home more appealing to potential buyers. However, you could run the risk of damaging your credit score if the buyer defaults. This is only if the lender doesn’t release you from liability for the mortgage.
View Article Sources
- Assumption of Loan Requirement Letter — Small Business Administration
- Chapter 7. Assumptions — U.S. Department of Housing and Urban Development
- Veterans and HUD — U.S. Department of Housing and Urban Development
- The Definitive Guide to FHA Loans — SuperMoney
- How Many Times Can You Use a VA Loan? — SuperMoney
- VA Loans vs. Conventional Mortgages: Which One Should You Choose? — SuperMoney
- Here’s Why VA Loans Are Better than Conventional Mortgages — SuperMoney
- How To Transfer Ownership of a House With a Mortgage — SuperMoney
- Best Mortgage Lenders | April 2022 — SuperMoney