Assumable Mortgages: How To Take Over An Existing Home Loan

An assumable mortgage allows a buyer to take over a seller's home loan, including the principal balance, interest rate, repayment period, and any other contractual terms. This means that the buyer can take advantage of a lower interest rate and skip the rigorous process of obtaining a new home loan from a bank. However, it is important to note that not all loans are assumable, and there may be additional costs, paperwork, and timeframes associated with the process. To assume a mortgage, the buyer typically needs to obtain approval from the lender and, in some cases, the original loan provider (such as the USDA or VA). The buyer will also need to compensate the seller for the amount of the mortgage they have paid off and pay an assumption fee.

How do you do an assumable mortgage?

The benefits of an assumable mortgage

An assumable mortgage is a financing option that allows a buyer to take over the seller's existing mortgage, including its terms, conditions, interest rate, remaining balance, and repayment schedule. This type of mortgage is relatively uncommon, and most conventional loans are not assumable. However, it offers several benefits to both buyers and sellers.

One of the primary advantages of an assumable mortgage is the potential for lower interest rates compared to current market rates. This can result in substantial savings for the buyer over the life of the loan. For example, if the current interest rate is 8% and the assumable mortgage rate is 5%, the buyer could save a significant amount in interest costs. Additionally, buyers can avoid closing costs such as origination and appraisal fees, which typically range from 3% to 6% of the loan amount. This can further reduce the overall cost of the loan.

Assumable mortgages can also simplify the selling process for both parties. Buyers can save time and effort by avoiding the need for a new loan application and appraisal. Sellers can benefit from using assumable mortgages as a marketing strategy to attract buyers, especially in competitive markets. Additionally, sellers can avoid settlement costs and may find it easier to negotiate a price closer to the fair market asking price.

Another benefit of assumable mortgages is that they can provide buyers with favourable loan terms and conditions. This is particularly advantageous when interest rates are high or when buyers may not qualify for a new loan with better terms.

While assumable mortgages offer these benefits, it is important to consider potential drawbacks and challenges. Buyers should carefully evaluate the terms and ensure they meet the necessary qualifications. Additionally, the loan amount on the assumed mortgage may not cover the full purchase price, requiring the buyer to pay the difference upfront or through a second mortgage. Furthermore, sellers may still be held liable for the debt if the buyer defaults on payments, unless they obtain a written release of liability from the lender.

How to find an assumable mortgage

Finding an assumable mortgage can be challenging due to the limited availability and specialised nature of these loans. Assumable mortgages allow a buyer to take over the seller's existing mortgage, often with little to no change in the original terms, especially the interest rate. This can result in significant savings for the buyer, as they secure a lower interest rate compared to new loans.

To find an assumable mortgage, you can employ various strategies:

• Utilise online platforms: Dedicated websites like AssumeList, Assumable, and Roam specialise in helping buyers find homes with assumable mortgages. These platforms provide valuable tools and resources to connect buyers with sellers offering assumable loans.
• Engage a real estate agent: Experienced real estate agents, particularly those familiar with assumable mortgages, can be invaluable. They have access to industry networks and listings that may not be publicly available, making them more efficient in identifying suitable properties.
• Search major real estate sites: Websites like Zillow offer keyword search options, allowing you to filter properties with assumable loans. Include keywords like "assumable," "VA loan," "FHA loan," or "USDA loan" in your searches to narrow down relevant listings.
• Explore public records: You can conduct a public record search on houses you are interested in to determine if their mortgages are assumable. Reviewing county records and mortgage documents can provide insights into the availability of assumable loans.
• Consider the sale date: Homes sold between 2019 and 2021 are more likely to have low-balance assumable loans. Properties sold before 2016 may also have assumable loans, but they could have been refinanced into conventional loans.
• Understand loan eligibility: To assume a loan, you must meet the lender's requirements, including evaluating your credit score, income, and other financial factors. Ensure you meet the eligibility criteria for the specific loan you are interested in.

The process of assuming a mortgage

An assumable mortgage is a home loan that can be transferred from the original borrower to the next homeowner. The interest rate and payment period remain the same, and the buyer will have the same monthly payments as the original borrower.

Step 1: Find an assumable mortgage

Firstly, you need to find a property with an assumable mortgage. Most conventional loans are not assumable, but government-backed mortgages can be. Government-backed mortgages include Federal Housing Administration (FHA) loans, U.S. Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans.

Step 2: Check your eligibility

Next, you need to check that you are eligible for the loan. This includes meeting minimum credit score requirements, and having a suitable debt-to-income ratio (DTI). FHA loans require a credit score of at least 580, VA loans typically require a score of 620 or above, and USDA loans require a minimum score of 640.

Step 3: Prepare the necessary documentation

You will need to provide documentation to process the loan, including proof of income and assets, and employment history.

Step 4: Submit your application

You will then need to fill out and submit an application to obtain an assumable mortgage. The process can vary depending on the lender, but you will generally need to provide the documentation outlined above, and submit to a credit check.

Step 5: Closing process

If your application is approved, you will need to fill out additional paperwork and pay closing costs. You will also need to pay an assumption fee, and potentially other costs.

It is important to note that assuming a mortgage can be a complex process, and it is recommended that buyers fully understand the pros and cons before committing to this type of mortgage.

The costs of assuming a mortgage

There are several costs to consider when assuming a mortgage. Firstly, you will need to make a down payment, but the amount depends on how much equity the seller has. You will also have to compensate the seller for the amount of the mortgage they have paid off, which could be less than a traditional down payment or much more. This can be paid out of pocket or financed through another loan.

Secondly, you will likely need to pay the lender an assumption fee, which is typically a percentage of the loan amount for conventional loans. For FHA loans, the assumption fee is capped at $1,800, and for VA loans, it is a maximum of $300.

Thirdly, there are closing costs, which are typically 2-5% of the loan amount. However, these may be capped, and you may save money by not needing a new appraisal. Closing costs on assumed government-backed loans are cheaper than the 2% to 6% you would normally pay to close a loan. Each government loan has its own cap on closing costs, keeping costs low.

Finally, there may be ongoing mortgage insurance costs. For FHA and USDA loans, you will inherit mortgage insurance premiums, which are always required for these loan types.

It is important to carefully review the loan agreement and consult with a local expert to understand the full costs of assuming a mortgage.

The risks of an assumable mortgage

An assumable mortgage allows a buyer to purchase a home by taking over the seller's mortgage loan. This means that the buyer will take on the remaining balance, repayment schedule, and interest rate of the seller's loan. While assumable mortgages can be attractive due to their potential for lower interest rates and simplified selling processes, there are several risks associated with them.

Firstly, there is a risk for sellers if the assumption is done informally or without the lender's approval. In this case, the lender can demand payment of the full loan amount immediately from the seller. Even if the assumption is done properly, the seller may still be responsible for the debt if the lender hasn't released them from liability. This can happen if the buyer defaults on the loan or if the lender hasn't sufficiently approved the sale.

Secondly, buyers assuming a mortgage may need to pay a substantial down payment or secure a new loan if the home's purchase price exceeds the mortgage balance. This is because they will need to compensate the seller for the amount of the mortgage they have paid off, which can be a large sum. Additionally, buyers will likely need to pay an assumption fee to the lender, which can be a percentage of the loan amount or a flat rate.

Thirdly, assuming a mortgage can increase the risk of default, especially if a second loan with a higher interest rate is required. This is because the buyer is taking on the existing loan with its original terms, which may not account for any increase in the home's value. If the house has gained value since the original loan was issued, the buyer may need to make up the difference, potentially resulting in higher monthly payments or a longer repayment period.

Finally, not all loans are assumable, and even if they are, the buyer must still qualify with the agency and lender. Conventional loans, for example, usually contain a due-on-sale clause that allows the lender to demand the entire remaining loan amount upon sale. This means that as soon as a buyer assumes the loan, they could be faced with a bill for hundreds of thousands of dollars.

Therefore, while assumable mortgages can offer benefits such as lower interest rates and simplified processes, it is essential to carefully consider and understand the potential risks involved before committing to this type of mortgage.

Frequently asked questions