What is an assumable mortgage loan?

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The process of buying a home usually involves applying for a new mortgage from a financial institution. But in some cases, buyers can get a loan without starting from scratch.

This is what happens with an assumable mortgage, which allows borrowers to take over the existing mortgage on the house they are buying. The new buyer takes full responsibility for the loan, which means the seller is off the hook.

This type of loan is often used in markets where mortgage interest rates are relatively high. Buyers can get an interest rate lower than the current market rate by taking over someone else’s mortgage. While that sounds like a lot, only certain mortgages qualify for this type of mortgage, and they come with a few drawbacks.

What is an assumable mortgage loan?

An assumable mortgage is a way to finance a house in which the buyer takes over the loan from the existing owner. The new borrower assumes the existing mortgage exactly as it is, with the same remaining balance, the same interest rate, and the same repayment terms.

When a buyer takes out a mortgage, they are responsible for financing the difference between the outstanding loan balance and the current value of the home. Suppose a homeowner sells his house at its current market value of $ 250,000, but has a remaining mortgage balance of $ 200,000 – the buyer will need to cover the remaining $ 50,000.

Which mortgages are assumable?

It is important to note that not all mortgages are assumable. If you are considering this type of financing, make sure you have the right type of loan.

Assumable loans include FHA loans, VA loans and USDA loans, according to Anthony Grech, principal mortgage originator at Luxury Mortgage Corp.

When is an assumable mortgage used?

Assumable mortgages allow homebuyers to take over an existing mortgage with its current interest rate and term. As a result, assumable mortgages become more popular when interest rates are high.

During the week of February 22, the average rate on a 30-year fixed-rate mortgage was 3.04%, a very low level in historical terms. Now imagine that in a few years mortgage rates could rise again. Rather than taking out a new mortgage, a future borrower could take out a mortgage from someone who borrowed when rates were low, thus locking in that low rate for themselves.

“Depending on how the next four years go, we could definitely see a situation where rates are trending up,” Grech said. “If the rates are double what they are now, I think we would see them more often. “

So what savings could make this type of mortgage worth it?

“Three-quarter point,” says Nicole Rueth, branch manager at Fairway Independent Mortgage Corporation in Englewood, Colorado. “There is no science in there, it is an art. A quarter point may be worth it, but somehow those three quarter points seem like the tipping point. “

In other words, homeowners could choose to take on someone else’s mortgage rather than apply for a new one if the existing loan has an interest rate three-quarters of a point lower than the current rate. of the market. As interest rates rise, so does the likelihood of someone taking out an assumable mortgage.

How to qualify for an assumable mortgage

Qualifying for an assumable loan is very similar to qualifying for any other FHA, VA or USDA loan.

Borrowers “are qualified to take on a loan just as you would be qualified to get the loan on their own,” says Grech. “You still have to be qualified in terms of credit and ability to pay. This means that taking on a mortgage is “not a way for people who do not qualify for a mortgage to suddenly get a house.”

The parties can only proceed with the assumption of the loan if the lender considers that the buyer is eligible for the loan.

This was not always the case. Before the late 1980s, the buyer did not necessarily need to qualify for a mortgage. The seller and the buyer of the house would privately accept the assumption of the mortgage without the buyer having to prove their creditworthiness.

“Assumable mortgages have changed dramatically from what most people remember about them,” said Bill Wilson, senior vice president of a branch of the Fairway Independent Mortgage Corporation in Las Vegas. “30 or 40 years ago, an assumable mortgage was not eligible. You’re gonna buy Bob’s house, and the bank has no say in it. Now borrowers must qualify like any other mortgage.

How much does it cost to take out a mortgage

The cost of an assumable mortgage is often less than the closing costs that buyers would pay for conventional loans, according to Wilson.

“The cost of taking over is typically a few hundred dollars, which would be small compared to the fees someone would pay to set up a new loan,” Wilson said.

Part of what helps keep assumable mortgage costs low is that there are caps on the amount lenders can charge. In the case of FHA loans, the Department of Housing and Urban Development prohibits lenders from charging more than the mortgagee’s actual costs. The maximum fee a lender can charge is $ 500.

Pro tip

If you are considering an assumable mortgage, make sure you understand your upfront costs. Depending on the outstanding loan balance and the current value of the home, you may need to pay a large down payment.

Advantages and disadvantages of assumable mortgages

Assumable mortgages can be an effective way to take advantage of a low interest rate, but they are not for everyone. Let’s talk about some of the arguments for and against this type of loan.

Advantages

  • Lower interest rate

  • Reduced closing costs

Advantages: lower interest rate

The main reason someone might use a deemed mortgage rate is to take advantage of a lower interest rate when market rates are high.

Mortgage rates are close to their historic lows and future borrowers may not have access to such favorable terms. By taking out a mortgage rather than taking out a new one, buyers can get a rate significantly lower than the market would otherwise allow.

Benefits: Reduced closing costs

Assumable mortgages come with lower closing costs, and the government agencies that insure them place caps on the fees that loan services can charge. As a result, buyers may have lower initial costs than they would have incurred by taking out a new mortgage.

Disadvantage: Only available on certain loans

Assumable mortgages are only available with certain government guaranteed loans. These loans come with limitations that you won’t find with a conventional loan.

“If I qualify for a conventional loan, I might not want to do it,” says Rueth. “I might want to go ahead and buy it with a conventional mortgage.”

Disadvantage: large deposit

One of the biggest challenges with assumable mortgages is that they often require a large down payment or creative financing to find one. When you assume someone else’s mortgage, you have to make the seller whole. If their home is worth $ 300,000, but it only has a remaining principal mortgage balance of $ 200,000, the buyer must provide the remaining $ 100,000 as a down payment.

According to Wilson, some borrowers may find other ways to finance the difference, such as using a home equity line of credit. But the problem with this arrangement is that the payments can eventually become unaffordable.

Home equity loans or lines of credit often have a drawdown period of 10 to 15 years when borrowers only pay interest. But once this drawdown period is over, borrowers need to start repaying their principal and may see their payments increase dramatically.

“When that loan is fully amortized, you’ll have a payment shock situation,” Wilson says. Borrowers may not “expect their payment to suddenly jump from $ 800 to $ 900 per month.”

Is an assumable mortgage a good idea?

There are both advantages and disadvantages to assumable mortgages, which may not be suitable for everyone.

“I would say the same thing as I would say to almost anyone looking for a particular mortgage,” says Rueth. “The first question I ask is, why? Why is this the loan you are applying for? Often times, it’s because someone told them.

You should do your research and make sure that an assumable mortgage is right for you in your financial situation, advises Rueth.

Final result

An assumable mortgage allows a buyer to take over or assume the seller’s mortgage rather than taking out a new mortgage. Assumable mortgages can be an effective way to take advantage of a lower interest rate than the current market allows.

But assumable mortgages are not for everyone. They are only available on certain government guaranteed loans and have other potential ramifications that could make them prohibitive.


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