Most of the time when you buy a house, you choose a lender, apply for a mortgage, and pay that mortgage off over a set time period. However, in some cases, you can take on an existing mortgage rather than applying for a brand new one.
This process is called an assuming mortgage and there are a number of reasons why a seller may offer this option to a buyer and why a buyer might want to take advantage.
As the name suggests, an assumable mortgage is when a buyer “assumes” or takes on an existing mortgage from someone else. In this financing agreement, an outstanding mortgage and its terms transfer from a present borrower to the new buyer. As such, the remaining balance, mortgage rate, repayment period, and other specific loan terms stay the same — the only thing that changes is who is responsible for the debt.
Assumable mortgages allow buyers to avoid the rigorous process of obtaining their own mortgage and potentially lock in more favorable rates in exchange for taking a home seller out of debt. When interest rates are high, borrowing is more expensive, which can make an assumable mortgage that was likely signed with a lower interest rate more attractive to buyers.
When a buyer assumes a mortgage, they take on the remaining loan balance at the original terms. But it’s important to note that the housing market has likely changed and the previous owner has gained equity in the home.
An assumable mortgage doesn’t account for equity. If the home is worth more than when the original loan was issued, the buyer must cover the difference with cash or another loan.
Say a seller has a $400,000 loan balance on a home, and found a buyer who has agreed to pay $600,000. The buyer inherits that $400,000 loan balance but will still need to come up with $200,000 to pay the seller for the equity that they’ve built in the home.
Many buyers who assume a mortgage take out a home equity loan. This second mortgage helps buyers who can’t cover the equity cost with cash. If the buyer in the previous example only had $100,000 in cash, they would take out a home equity loan for another $100,000, making their total mortgage debt $500,000 — essentially the same as if they were to buy the home with a single traditional mortgage.
However, the assumed mortgage may have a lower interest rate while the new mortgage is for a significantly less amount than what you would have to take out in a traditional mortgage scenario. As such, two monthly payments could still be a fair amount less than the single ordinary one.
While all types of mortgage loans can technically be assumed, conventional loans are assumable only in special cases. Government-backed loans — Federal Housing Administration (FHA) loans, U.S. Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans — are generally assumable, as long as the lender approves the sale.
In most cases, conventional loans are not assumable because most mortgage contracts contain a due-on-sale clause, which demands that you pay the entire remaining loan amount as soon as you sell the property.
If a seller has a conventional adjustable-rate mortgage (ARM) and meets certain financial qualifications, the mortgage could be eligible for assumption. As long as a borrower doesn’t exercise any option to convert the loan to a fixed-rate mortgage, a conventional ARM would likely be assumable.
For FHA loans originated on or after December 15, 1989, a lender must approve an assumable mortgage to a creditworthy buyer. Under special circumstances like the death of the mortgage holder and inherited property, a lender doesn’t need to check the creditworthiness of the buyer or approve the sale.
All VA loans are assumable, but with additional rules and qualification requirements.
Most USDA loans — which are offered to buyers in rural specially qualified areas — are assumable, typically in one of two ways:
Assuming a mortgage have benefits and disadvantages for both buyer and seller.
In normal circumstances that don’t involve inheritance or family transfer in certain types of loans, buyers who want to assume a mortgage must still go through a vetting process.
Like a traditional mortgage, lenders will check a buyer’s credit score and debt-to-income ratio (DTI). They may also require additional information like employment history, income information, and asset verification.
Even the most rigorous assumable mortgage processes, however, are less intensive than applying for a traditional mortgage.
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