There are many ways to structure a loan for buying a home. One lesser-known way is with an assumable mortgage. Here’s what that means and how it works:
What is an Assumable Mortgage?
An assumable mortgage is a home loan where the buyer legally takes over the seller’s mortgage. The buyer assumes payments, right where the seller left off. The buyer will have to pay the seller the difference between the purchase price and the remaining mortgage balance, either in cash or with a second home loan. No appraisal of the home is required, but buyers should definitely still order inspections to make sure there are no surprises after the sale closes. Once it does close, the buyer is the new owner of the loan and the seller is removed from the mortgage.
When Would an Assumable Mortgage Make Sense?
There are several reasons an assumable mortgage might be the right choice in a home sale, including:
- Current Interest Rates Are High
If going market mortgage rates are currently much higher than the rate on the seller’s mortgage, the buyer could save tens of thousands of dollars in interest over the course of the loan. - You Don’t Have the Best Credit
The types of loans that are assumable have lower credit score requirements than others, so going this route might be the easiest way for some borrowers to realize homeownership. - Family Death
If your loved one dies while they still have a mortgage balance and you inherit the house, assuming their loan would keep the costs down of paying off the rest of the loan. Refinancing into a new loan might cost you several thousand in closing costs and the interest rate may be higher. - Divorce
If you go through a divorce and you keep the house, but your spouse was the only name on the mortgage, you might want to assume the mortgage to keep all the terms the same.
What Are the Risks?
The risks are typically greater for the sellers. If the transfer of the mortgage does not proceed properly for any reason, the seller may still be on the hook for the mortgage payment even though the buyer is now in possession of the house.
Are All Home Loans Assumable?
No. Conventional mortgages are not assumable. In general, the only loans that are assumable are government- backed mortgages like FHA, VA, and USDA. And in most cases, sellers must obtain approval from those agencies to let someone assume their loan.
FHA Loan Requirements
For an FHA loan to be assumable, the seller must have lived in the home as a primary residence for a specified period of time and buyers have to get approved through the standard FHA loan application process. Two benefits to buyers, though, include small down payments of just 3.5% and minimum credit scores of 580.
VA Loan Requirements
Although VA loans are guaranteed by the Department of Veterans Affairs and made to those who are current or former service members and spouses, VA loans can be assumed by those who are not associated with the military. The loan may have to be approved by the Regional VA Loan Center, which means a longer wait time, but the loan terms can be worth it. Sellers should be aware however, that if the buyer defaults on the loan, sellers could lose their entitlement for future VA loans. To avoid this, sellers should have buyers sign a release of liability after closing and provide proof to the VA.
While assumable loans are not possible in every situation, in some cases they can be very helpful to buyers when it comes to saving money and becoming a homeowner sooner.
If you need help with an Assumable Mortgage or any other type of mortgage, give us a call today!