Assumable Mortgages Overview

What Is An Assumable Mortgage?

Assumable mortgages allow a buyer to assume the seller's home loan. However, some loans cannot be assumed, such as VA and FHA loans.

Assumable mortgages are those that the buyer of a house can take over from its seller. Usually, with lender approval, there is little to no change in terms of interest rates. The buyer agrees that they will continue to pay the loan in the same manner as the original loan.

Advantages Of Taking Over The Seller's Loan

Both the buyer and seller have advantages when they process an assumable mortgage or take over the seller's loan. This is especially true if the seller's mortgage interest rate, which is usually lower than current market rates, is lower than what the buyer may be able to obtain based on their credit history.

The buyer will save immediately if current market rates are 6 percent, but the buyer can take out a mortgage at a rate of 4 percent.

When one assumes a mortgage, there are fewer closing costs. As a result, the buyer can save money, while the seller can benefit. The seller may be able to negotiate a lower price if the buyer is able to pay less money to close the deal.

This marketing strategy is also beneficial to the seller, as not all mortgages can be assumed. Therefore, it could give the seller an advantage over other homes on the marketplace.

Advantages

If the property's value exceeds the mortgage remaining on it, the buyer may need to take out a second loan or bring a large amount of cash.

If the house is being sold for $250,000 and there is a $100,000 mortgage remaining, the buyer will need $150,000 to make up that difference. You have two options: pay the remainder in cash or get a loan to cover the difference.

The buyer may need to borrow another loan. This could cause problems as the mortgage lenders might not be willing to work together. The other lender could be liable if the buyer defaults on a loan. In some cases, it might not be allowed contractually. The benefits of an assumable loan are also diminished if you take out another loan.

Release From Liability

If the paperwork is not completed to release the seller from the responsibility for the loan, it could cause a problem for the seller.

If the seller remains bound to the mortgage and the buyer defaults, the seller will likely be responsible for any mortgage payments or other losses the lender may not recover. This scenario can be avoided by the seller only participating in an assumable loan if they are able to obtain a release from the mortgage holder.

Unauthorized assumable mortgages can be entered into by anyone, even if the lender is not involved. For example, the seller invites someone to come in and make the mortgage payments. Or, the buyer can pay the seller monthly like a landlord. However, the seller is still the owner and continues to be responsible for the mortgage. These cases are not considered assumable mortgages and can be a problem for sellers. All possibilities are dependent on what is in the mortgage contract. This is a legal document.

FHA And VA Assumable Loans

Assumable loans are those that have been insured by the Federal Housing Administration or VA loans that the U.S. Department of Veterans Affairs has guaranteed. However, some conditions must be met.

VA loans closed before March 1, 1988, are available for assumption without any conditions. These loans are often referred to as "freely assumable loans," and there is no funding fee. Important to remember that the seller can still be responsible for the mortgage if the buyer defaults. In these cases, it is strongly recommended that veterans request VA release of liability. This does not restore entitlement. To have their entitlement reinstated, a veteran must apply to the VA.

Assumable mortgages are less likely to be accepted by buyers for homes from this era. This is due to the fact that many mortgages have been paid off or the remaining mortgage amount is insufficient. In addition, the interest rates on mortgages from the 1980s will likely be double-digits, which is not comparable to today's low rates.

Buyers will need to be approved by either the lender or the relevant federal agency for FHA loans or VA loans that have been closed after the above dates. FHA loans have some restrictions, including the length of time a homeowner can live in their home without being subject to penalty. In addition, FHA stipulates that homeowners must have a certain income or that buyers (even assumable borrowers) must meet certain creditworthiness standards.

FHA standards are required for newer FHA loans. Buyers who wish to take over the loan must meet these requirements. This is sometimes easy. Credit scores as low as 500 can be obtained with a 10% downpayment for certain FHA programs. FHA lenders prefer that the score be at least 602.

FHA might also deny the assumption if a buyer has filed a Chapter 7 bankruptcy within the last two years or if he/she is in foreclosure within the last three years.