An assumable mortgage allows a seller to pass their current mortgage to a buyer, who “assumes” their mortgage terms. This type of arrangement could provide for great advantages for both buyers and sellers – but it comes with caveats.
Understanding Assumable Mortgages
Lenders have to approve assumable mortgages. When a buyer assumes a home loan from a seller, that typically means the buyer inherits the seller’s interest rate, repayment schedule, and current loan balance. The buyer is contractually obligated to the loan’s original lender. Out of all loan types, assumable loans are most commonly seen on government-backed loans, such as Federal Housing Administration (FHA) loans and Veterans Affairs (VA) loans.1
Types of Loans That Are Assumable
You might be able to get an assumable loan if the loan falls under one of the following categories:
1. FHA Loans
These government-backed loans are assumable subject to the approval of a lender. A lender may want to make sure that both the buyer and the seller meet certain criteria, such as the buyer having a certain minimum credit score.
2. VA Loans
VA loans can be assumed by anyone, even if they aren’t Military members, Veterans or surviving spouses. But it’s important for the seller to keep in mind that if they would like to have their VA entitlement restored, they’ll have to sell to a fellow Military member, Veteran or surviving spouse.
3. Conventional Loans with an Assumption Clause
Most conventional loans will have a “due-on-sale” clause, which mandates that the remaining loan balance be repaid upon sale of the home. But in some cases, the mortgage may provide the flexibility of assumption.
Advantages of an Assumable Mortgage
The main reason buyers might consider assuming a mortgage are the possible cost savings, but below is a more detailed breakdown of the benefits of an assumable mortgage:
1. Potentially Lower Interest Rate
Locking in a rate that is lower than the current market rate could potentially save a buyer thousands of dollars over the life of the mortgage.
2. Reduced Fees
Fees tied to assumable loans may be lower than they are for the origination of a brand new loan. Oftentimes, an appraisal isn’t required for an assumed mortgage. A lender may charge an “assumption fee,” but certain loans set limits on the amount lenders can charge for this.
3. Enhanced Appeal for Sellers
Because an assumable mortgage is often appealing to buyers, sellers may be able to attract more buyers, command a higher sale price and enjoy a shorter timeline on the housing market.
Important Considerations
If you are considering assuming a mortgage, here are a few crucial factors to think about before you make your decision:
1. Equity Repayment: If the seller has significant equity built up in the home, the buyer might have to repay that amount in cash or otherwise secure secondary financing.
2. Qualification Process: The lender will usually require the assuming buyer to meet certain criteria, such as a minimum credit score and income. Learn more here.
3. VA Entitlement Release: If a VA loan is being assumed, the original borrower must get a “release of entitlement” if they want to use their VA benefits again, and they may only be able to do this if they’re selling to another Military member, Veteran or surviving spouse.
4. Limited Availability: Keep in mind if you’re on the hunt for an assumable mortgage that many mortgages are not assumable.
Assuming a Mortgage After Death or Divorce
In these situations, assumption might be able to occur even if an assumption clause isn’t in the existing mortgage agreement.
If an heir decides to take over a loan from a deceased relative, they are then obligated to the lender for mortgage payments. They will have to verify to the lender that they are the correct heir and owner of the property they wish to assume.
If an individual receives ownership of a home in a divorce, they may assume the mortgage, but they will probably be required to undergo the credit qualification process so the lender can verify that they can pay the mortgage on their own.
Want to Know More?
Newrez loan experts are happy to walk you through the particulars of assumable loans. It’s our goal to get you exactly what you need to reach your homeownership goals.
Talk to a loan pro today.
References:
1 Assumable Mortgages Explained: Pros, Cons, and Costs | Redfin
