Roger and Amber realized early that they couldn’t afford a mortgage loan at the current interest rate of 7.6%. So, they inquired if their seller’s mortgage was assumable. They found out that it was and assumed the existing mortgage at an interest rate of 3.5%.
A mortgage is assumed when a buyer “assumes” a seller’s mortgage. This blog will help you understand what an assumable mortgage is. Its benefits, and how to qualify for one.
ASSUMABLE MORTGAGE- AN OVERVIEW
- Assuming an existing mortgage is an attractive option for buyers as its terms are more favorable than a contemporary mortgage.
- To assume a mortgage, the buyer must meet the lender’s qualification criteria, make the downpayment and draft a “assumption deed”.
- There are costs associated with assumable mortgage, such as assumption fees and appraisal fees.
What Is an Assumable Mortgage?
An assumable mortgage is a type of mortgage that allows a buyer to take over the existing mortgage. The buyer accepts the rate, the outstanding principal balance, the repayment schedule, and other conditions.
How Does an Assumable Mortgage Work?
The process of assuming a mortgage is different from the normal mortgage loan process. Here’s how it typically works:
- Identify an Assumable Mortgage: Confirm with the seller or lender whether the option to assume the mortgage is available, as not all mortgages offer this option.
- Qualification and Approval: The buyer will need to meet the lender’s qualification criteria to assume the mortgage. This includes factors such as creditworthiness, income verification, and fulfilling any other requirements set by the lender.
- Assumption Agreement: Both the assuming party and the original borrower will need to execute an assumption agreement. This agreement outlines the terms of the assumption, including the assuming party’s responsibility for repayment set by the lender.
- Closing Process: The assumption is finalized and the assuming party pays the seller’s agreed-upon price for the property. The lender then will transfer the mortgage to the assuming party.
Moreover, the assuming party overtakes the additional mortgage-linked payments. Payments such as escrow amounts for property taxes and insurance.
Which Mortgages are Assumable?
Though assumable mortgages are rare nowadays, they still exist in specific loan programs. Here are some common types of mortgages that are assumable:
- FHA Loans: FHA loans are assumable under certain conditions. The buyer needs to have a credit score of more than 580 and a DTI ratio of less than 42%.
- VA Loans: All VA loans committed after March 1, 1988 are assumable.
- USDA Loans: To assume a USDA loan, you must have a stable income and credit score of more than 620.
It’s important to note that even if a mortgage is assumable, the assumption is subject to lender approval.
How to Qualify for an Assumable Mortgage?
Qualifying for an assumable mortgage loan involves several steps. Here’s a stepwise guide:
- Verify Assumability: Confirm that the mortgage loan is assumable. Not all mortgages offer this option, so it’s essential to review the loan terms to determine if an assumption is allowed.
- Meet Lender Requirements: The buyer must meet the lender’s qualification criteria. This includes creditworthiness, income verification, employment history, and debt-to-income ratio. Additionally, the lender may require a credit check and financial documentation to assess the buyer’s ability to repay the loan.
- Make Down Payment: Depending on the lender’s requirements, the buyer may need to provide a down payment for the property purchase. This amount is determined by the lender and will vary based on the loan-to-value ratio.
- Sign the Assumption Agreement: Both the assuming party and the original borrower will need to sign an assumption agreement. The lender or a real estate attorney prepares the assumption agreement.
Remember, before proceeding with the above steps, the lender’s consent is vital. The assuming party must submit an application to the lender and await their approval.
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How Costly is it to Assume a Mortgage?
The cost associated with assuming a mortgage can vary depending on various factors. Cost of terms of the existing mortgage, lender requirements, and specific circumstances.
Here are some potential costs to consider when assuming a mortgage:
- Assumption Fee: Some lenders may charge an assumption fee to process the transfer of the mortgage. This fee can vary and is typically paid by the assuming party. It is important to check with the lender to understand if an assumption fee applies and its amount.
- Closing Costs: Assuming a mortgage can potentially save on certain closing costs, there still will be some expenses involved. These can include title search fees, attorney fees, recording fees, and other associated costs. The specific closing costs will depend on the location and the complexity of the transaction.
- Appraisal or Inspection Fees: In some cases, the lender may require an appraisal to determine the current market value of the property. The buyer may bear the cost of these assessments.
Though an assumable mortgage has some costs linked with it, its benefits outweigh these expenses.
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Pros and Cons of Assumable Mortgages
Pros✅
- Potentially Favorable Terms: Assumable mortgages are advantageous for the buyer as the existing mortgage has more favorable terms. This includes low-interest rates, longer repayment periods, or any other unique feature.
- Lower Closing Costs: Assuming an existing mortgage can save on certain closing costs, such as loan origination fees, appraisal fees, and title insurance fees. This is beneficial for the buyer, as they can avoid paying these expenses associated with obtaining a new mortgage.
- Easier Qualification: Assumable mortgages provide an easier qualification process for the buyer. The buyer can skip the entire loan application process and undergo a separate credit evaluation if they meet the lender’s requirements.
Cons❌
- Limited Availability: Assumable mortgages are less common today than in the past. It may be challenging to find a property with an assumable mortgage that meets your specific needs and preferences.
- Qualification and Approval Process: Although assuming a mortgage can be easier in terms of qualification, the assuming party still needs to meet the lender’s criteria. This includes demonstrating a good credit score, income verification, and fulfilling any other requirements set by the lender.
- Seller Liability: In some cases, the original borrower may remain partially liable for the mortgage even after the assumption. If the assuming party defaults on the loan, the seller may still be held responsible. This potential liability may deter some sellers from offering assumable mortgages.
Additionally, assuming a mortgage means accepting the existing terms and conditions. Buyers may have limited negotiating scope including interest rates or repayment terms.
Bottom Line
An assumable mortgage is the easiest way to get rid of the new loan application process. However, it is crucial to carefully evaluate its terms and conditions.
Make sure you thoroughly analyze its financial implications and seek professional advice from lenders or mortgage professionals.
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Frequently Asked Questions
Are assumable mortgages still available?
Yes, most government-backed loans, including all FHA loans, are generally assumable, as long as the lender permits the sale.
How do I know if I can assume a mortgage?
To know whether your mortgage is assumable, search for an assumption clause in your mortgage agreement.
Are most mortgages assumable?
Most mortgages aren't assumable. Typically, only government-backed loans are assumable.
Does an assumable mortgage benefit the seller?
Yes, an assumable mortgage is beneficial for the seller too. An assumable mortgage makes the property more marketable if the interest rates have risen in recent times. Therefore, resulting in fewer days on the market for the property.
