Real Estate Investing

4 Things to Know About Assumable Mortgages 

March 28, 2024

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A Guide To Assumable Mortgages

Looking to buy a home or new investment property? One option is to choose homes for sale with assumable mortgages.  

In this article, you’ll learn the ins and outs of this unique option in the housing market, including how assumable mortgages work, their benefits, drawbacks, and how you can qualify. We’ll cover four things you should know about assumable mortgages before you take one on, and then cover some commonly asked questions about this home loan option.  

#1: How Assumable Mortgages Work 

First things first: What is an assumable mortgage? 

An assumable mortgage is a specific type of financing arrangement in which a property owner transfers their current active mortgage (including all its terms and conditions) to a new buyer, who assumes both the property and the loan. 

Buyers often choose assumable loans to avoid taking out loans themselves, especially if loans they could obtain themselves have much higher interest rates than the original property owner’s loan. 

Assumable mortgages work by transferring the loan responsibility from the seller to the buyer, who is then responsible for the outstanding mortgage balance. When you, as the buyer, take over an assumable mortgage, you step into the shoes of the original borrower. This means you inherit the terms and conditions of the existing loan, including the interest rate, remaining balance, and repayment schedule. 

A few of the most popular government loans are assumable, including Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and U.S. Department of Agricultural (USDA) loans. Note, however, that buyers are still subject to the agency’s requirements for these loans. Conventional loans backed by Fannie Mae and Freddie Mac typically aren’t assumable. 

It’s important to note that in order to be relieved of all responsibility for the debt, sellers must sign a written release of liability when the mortgage is assumed, which must be approved by the lender. If they do not, sellers can still be held liable for defaults in the loan even after the new buyer has acquired the assumed mortgage. This can negatively affect the seller’s credit score, among other things. As a seller in a mortgage assumption agreement, be sure that you sign the release and ensure that your lender approves it so that you aren’t punished for the new mortgage-holder’s default. 

#2: Benefits of Homes for Sale with Assumable Mortgages 

Assumable mortgages offer potential buyers a unique advantage in the real estate market by allowing them to take over existing loans with favorable terms and conditions. One significant benefit is the potential for lower interest rates. If the current interest rates are higher than the rate on the assumable loan, you could save money over the life of the mortgage. 

Additionally, assumable mortgages can save you money on closing costs since you won’t need to secure a new loan. They also provide a quicker and easier closing process since the loan assumption can be faster than applying for a new mortgage. These benefits, and others, make assumable mortgages very attractive to some buyers, especially those buying in markets with high interest rates. 

#3: Drawbacks of Assumable Mortgages 

One significant drawback to consider is that not all mortgages are assumable. If the seller has an older loan or a loan with specific terms that don’t allow assumption, you may not be able to take advantage of this feature. You will have to filter through listings to find homes for sale with assumable mortgages.  

Another downside is that assuming a seller’s mortgage doesn’t necessarily mean you’ll get better terms. The current interest rates and terms of the assumed loan may not be as favorable as what you could get with a new conventional loan, FHA loan, or VA loan. Assumable mortgages can also require high down payments, especially if the seller has accumulated a high amount of equity in their home.  

Lastly, assuming a mortgage may come with assumption fees and other closing costs when selling or buying that can add to the overall expenses. It’s up to you, the buyer, to investigate loan options and weigh the pros and cons to determine which type of financing is most beneficial for you in your current market. Make sure to weigh these factors carefully before deciding to go the assumable mortgage route. 

#4: Qualifying for an Assumable Mortgage 

If you’re considering assuming a mortgage, you’ll need to meet the lender’s requirements for qualification. Lenders typically scrutinize your credit score, income stability, and debt-to-income ratio when assessing your eligibility for assuming a mortgage. 

A good credit score is crucial, as it demonstrates your ability to manage debt responsibly. Lenders also evaluate your income to ensure you can afford the mortgage payments. Stability in your income source is essential to prove that you can consistently meet payment obligations. Additionally, a favorable debt-to-income ratio – the percentage of your monthly income that goes towards paying debts – is important. 

Meeting these criteria is vital to qualify for assuming an existing mortgage contract successfully. Be prepared to provide documentation and undergo a thorough financial assessment. 

Frequently Asked Questions 

Can I Assume a Mortgage on a Property That Is Not Listed as Assumable? 

You can’t assume a mortgage on a property that’s not listed as assumable. If there is a loan you want to assume, confirm with the lender if they allow it. Non-assumable mortgages need other financing options. 

Are There Any Restrictions on the Type of Properties That Can Have Assumable Mortgages? 

You can assume mortgages on various property types, but restrictions may apply. Lenders might have specific criteria for assumable mortgages. 

Do I Need Mortgage Insurance for an Assumable Loan? 

Yes, as part of your assumable loan payment, you will need to make mortgage insurance payments. Most FHA loans and USDA loans include a mortgage insurance payment to be paid monthly. 

What Happens to the Original Borrower’s Credit Score When a Mortgage Is Assumed? 

When a mortgage is assumed, the original borrower’s credit score may still be impacted if the new borrower defaults. This, and the potential closing costs when selling a home with an assumable mortgage, are things to for the seller to consider.  

Are There Any Additional Costs or Fees Associated with Assuming a Mortgage? 

When assuming a mortgage, you may encounter additional costs and fees, such as loan assumption fees or closing costs. It’s essential to carefully review the terms of the assumption to understand all financial obligations, as with all conventional mortgages. 

Can a Mortgage Be Assumed by Someone Who Is Not Currently on the Loan? 

Yes, a mortgage can be assumed by someone not on the original loan, subject to lender approval. 

Conclusion 

In conclusion, assumable mortgages can offer a unique opportunity for buyers to take over an existing mortgage with favorable terms. While they can provide benefits such as potentially lower interest rates and reduced closing costs, there are also drawbacks to consider. 

It’s important to carefully evaluate the terms of the assumable mortgage and ensure that you meet the necessary qualifications before pursuing this option. 

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