The mortgage process, no matter how prepared a borrower may be, can be long and troublesome when purchasing a home. Often overlooked, sellers also have their fair share of hoops to jump through when exiting a mortgage agreement, typically to enter a new one for their new home. The ever-present processes of the mortgage industry dictate that no matter what position you find yourself in, mortgages are not things that were meant to be so easily obtained or discarded.
Of course, like with most things in today’s times, there are loopholes to be found with this ideology. Imagine if you could purchase a home, but instead of going through all of the lengthy tasks and back and forth of applying for your very own mortgage, you just picked up where the seller left off. Seems unrealistic, right?
The crazy thing is, while most mortgage loans do not allow such a thing to occur, there are still plenty of these “assumable” mortgages in existence!
An assumable mortgage is a type of mortgage loan agreement in which the terms and the remaining balance of a mortgage can be passed from the seller of a home (and original owner of the mortgage loan) to a buyer. In short, it allows home buyers to take on or “assume” the home loan from the home seller. This includes the loan balance, interest rate, and remainder of time for repayment, as well as any other terms listed in the mortgage contract.
Assumable mortgages aren’t too common in the industry, but they tend to be extremely popular to home buyers who have the opportunity to get them, especially when the interest rate is lower than the current market rate. Possible savings aside, they are just as popular among home buyers who want nothing more than to skip the time consuming process of finding and applying for a new mortgage.
Still, assumable mortgages are not affected by the rise and fall of the current market rates, so acquiring one with an interest rate lower than what is currently available on the market is a major benefit for any home buyer. Even so, the plausibility of benefiting from an assumable mortgage is highly dependent on the equity in the home.
How does an Assumable Mortgage work?
Assumable mortgages aren’t much different from standard mortgages in circulation. The main difference is that they can be transferred from the original borrower to the new buyer. Being the buyer, in this case, means forgoing the usual rigmarole that is typically attached to getting a home loan in favor of the much more simple process involved with assuming a mortgage loan.
For example, The home buyer wants to buy a home worth $200,000. The homeowner has an assumable mortgage with a principal balance of $180,000. The buyer, if eligible, can acquire the mortgage as-is with the remaining $180,000 and original repayment date, and simply continue paying for the home as the new owner. Of course, the home buyer is also responsible for the difference between the loan remainder and the sale price of the home.
While the original borrower has to go through the full mortgage process and prove that they are eligible for the loan, etc., the transfer of the loan doesn’t require nearly as much effort from either the buyer, bank, or seller. All that needs to happen for a successful transfer are a few key things.
The loan must be an assumable mortgage, to begin with. This is the very first thing to remember. Assumable loans aren’t a majority, so it is crucial to be sure the loan is assumable before moving forward.
In order to assume a mortgage, the buyer must prove themselves eligible to the lender or institution servicing the loan. This may require some of the standard documentation associated with getting a mortgage like tax forms, employment verification, bank statements, and credit reports. Regardless, it isn’t nearly as daunting as starting from scratch.
Once the lender can scrutinize the provided information, they will either approve the assumption or deny it. An approval means that the home buyer can pick up where the original borrower left off with the mortgage once the transaction is complete.
As for the seller, there is a hidden risk to assumable mortgages in the liability aspect. You see, the lenders are only truly concerned with the repayment of the loan. Because of their focus on this, there is sometimes no inclusion in the loan transfer contract that actually rids the original borrower from liability in the case of borrower default once the mortgage has been transferred to the new home buyer. As such, there have been cases where the new borrower defaults on the mortgage loan, and the liability is still with the original borrower, who then must deal with the consequences.
In response to this, the usual practice is for the seller to have a “release of liability” contract drafted and signed at the time of closing, to ensure that the new home buyer assumes not only the mortgage but the full responsibility of repaying the loan in full as well. This completely relieves the seller of risk after signing over the loan to the buyer.
Types of Assumable Mortgages
As we’ve covered earlier, assumable mortgages aren’t as abundant as one would hope. As a matter of fact, besides some rare cases, conventional loans are not typically assumable. As it turns out, only the FHA loan program and the VA loan program are consistent in offering assumable mortgages.
That said, home loans guaranteed by the FHA are actually quite popular, particularly among first time home buyers. This means that there is a good chance to snag an assumable mortgage providing the borrower chose an FHA option for financing. On top of that, assuming an FHA loan can be quite beneficial, since FHA loans are well known for having highly competitive interest rates.
VA Loans have always been considered some of the most beneficial on the market, with the elimination of down payment requirements and insanely low interest rates. Even so, It isn’t exactly common knowledge that these loans are assumable. What's really interesting is that VA loans can be assumed by anyone; not just veterans or military personnel. In fact, assuming a VA mortgage is the only way a non-military home buyer can get their hands on one.
Earlier, we mentioned the rare cases where a conventional loan is assumable. To clarify further, this is only possible within the adjustable rate mortgage subcategory of conventional loans. Within a select few conventional ARMs, there are lenders who are willing to make the mortgage assumable. The reason behind this inclusion is probably that in any case, the interest rate will rise to closely match the current market rate on a yearly basis. That would mean that the new home buyer would still have to contend with the natural fluctuations of the market.
Still, it is extremely rare.
Who is the Ideal Borrower for an Assumable Mortgage?
You’re probably aware by now that the first borrower of an assumable mortgage probably isn’t too concerned as to whether their home loan is assumable or not. There aren’t many buyers who truly consider this a major factor in deciding what home loan works best for them. To be quite honest, the original borrower of an assumable mortgage is one that was an ideal borrower for an FHA or VA Loan.
As for a new home buyer looking to assume a mortgage, that is a different story altogether. Assuming a mortgage means picking up where the original borrower left off. That means that the remaining loan balance, interest rate and term length must all be worth taking on for the new home buyer. Typically, the deal is best when the locked-in rate of the assumable mortgage is lower than the current market rate.
The ideal borrower for assuming a mortgage should be able to seamlessly take over mortgage payments as they were paid by the original borrower. This at least should be obvious. What will truly make the difference is the new borrower’s ability to pay the difference between the sale price and the equity of the home.
You see, assuming a mortgage doesn’t mean getting the home for the price of the loan balance. While it is a possibility, homeowners who have built up equity are not likely to walk away from it just to sell their home. In a lot of cases, the loan balance on an assumable mortgage is nowhere close to the value of the home. So what happens then?
The new home buyer has two choices. If they are approved to assume the mortgage, they have to pay the difference between the sale price of the home and the loan remainder in one of two ways. If the new home buyer has the funds on hand to pay it in a down payment, then it is smooth sailing as soon as the deal is closed.
On the other hand, when there is a large difference between the two amounts, most borrowers have to take out a second mortgage in order to be able to cover that cost. This comes with its own interest rate and loan terms, so in many cases, it can be more expensive than simply taking out a new loan altogether for the full home price.
Either way, considering assuming a mortgage means being able to qualify for a second mortgage if need be. One large enough to cover the equity value. If not, then the difference must be paid up front as a down payment, and it could be quite a large expense.
The ideal borrower to assume a mortgage must keep that cost in mind, as well as whether or not it will be cost effective to take out that second mortgage in order to assume the original mortgage. Every situation is different, so it is up to the borrower to do the due diligence and make an informed decision.
How to acquire an Assumable Mortgage
Assuming a mortgage is much easier than applying for a new home loan. It isn’t without its own due process, but the pace and steps involved are nowhere near as complex as the standard mortgage process. This fact alone probably accounts for a decent portion of the popularity behind assuming a mortgage.
Still, many borrowers are unaware that assuming a mortgage is even an option, let alone how to go about assuming one. Rest assured, it isn’t nearly as complicated as one would imagine. In order to assume a mortgage there are some steps that should be followed:
Find out if the Mortgage is Assumable. This may seem obvious, but the first thing a home buyer should figure out if they intend to assume a mortgage is whether or not the mortgage can be assumed in the first place. We discussed earlier the inherent assumability trait of FHA and VA loans, so at least if the current loan falls into one of those categories, it should be okay to assume that the answer is yes here.
On the other hand, while most conventional loans are not assumable, there are some rare cases where the lender will allow it. It never hurts to check, so always discuss whether the mortgage is assumable with the lender servicing the original mortgage.
Assess the potential value of assuming the loan. Assuming a mortgage is not some magic means of instant savings. There are quite a few factors at play when considering taking on someone’s home loan for yourself. Things to consider include (but are not limited to):
Time: If you are looking to get a home quickly, assuming a mortgage is one of the fastest routes to homeownership. Approval from a lender typically takes around 30 days.
Interest Rate: This is one of the big ones. Taking over a mortgage is most valuable when the current market rate is higher than the rate of the mortgage that would be assumed. There are very few ways to score a low interest rate, and assuming a mortgage is actually one of the easier ways to go about it. If the rates are lower, then it may actually be cheaper to just take out a new home loan.
Home Equity: The equity is probably the most important thing to be aware of when trying to decide whether to assume a mortgage or not. This is because the buyer is responsible for paying the difference between the principal balance due on the loan, and the sale price. Of course, the more equity in the home, the higher this cost is. It can be paid up front as a down payment, but the greater the cost, the less likely a new home buyer would be able to come up with the funds out of pocket. The alternative is for the new home buyer to apply for a second mortgage to cover the amount of equity. The second mortgage is a new loan, unbound by the terms of the original loan. This means that it involves its own set of qualifications, terms, and cost. Understanding the addition of these costs is paramount to deciding if assuming a mortgage is the more cost-effective option.
Keep in mind that qualifying for the second mortgage will affect both the time it takes to complete the entire transaction and the savings made from a lower interest rate on the assumable mortgage if the interest rate on the second mortgage is at or above the market rate. Not to mention that many lenders only offer second mortgages with an adjustable interest rate, which can get more and more costly over time.
Secure the necessary funds. If a buyer is going through with assuming a mortgage, then they must be able to pay that equity value in one way or another. If they have the money saved up and put aside, then this is a relatively simple step. If not, then this is when the home buyer will have to get their finances in order so that they can begin with the application process for that second mortgage. This should be done as soon as possible so that when the closing date for the home arrives, the funding is in place to make the payment towards the equity value.
Request an application to assume the mortgage. To put things into motion, the home buyer needs to ascertain from the seller who the lender servicing the mortgage loan is, in order to request an assumption package from them. Having a discussion with the lender about their assumption policies at this time is also quite beneficial.
Gather the required documentation. While the process for assuming a mortgage may be less strenuous than applying for a new home loan, it still requires much of the same documentation. The lender must deem the new home buyer eligible to assume the mortgage before proceeding, which means scrutinizing their financial profile. The standard documentation applies here, so that means gathering:
Vehicle financial information
Proof of Employment
Previous employer references
Self-employed borrowers need to provide at least 2 years worth of tax documents
Statements from any secondary, investment, or savings accounts
Up to date property tax statement for the property being bought
Every lender is different, but the general rule is to provide the documentation you would have needed in order to apply for the actual loan. Its the safest bet to ensure you have everything you need.
Complete the Application. Typically, there are a bunch of forms to fill out in this step. The new home buyer should fill out the application in full along with any other required forms such as:
Real estate agent agreement forms
Any paperwork from the title company involved in the transaction
A release of information authorization form
It is highly recommended that the new home buyer keep copies of all of the paperwork for their personal records.
Follow through. After submitting the application, there are still a few things that must be done. It is during this time that the new home buyer’s credit history will be pulled and looked over. It is not uncommon for the lender to call the new borrower to get answers for any questions or red flags that pop up during the scrutiny of the credit report. Also, the first of the TILA-RESPA integrated disclosure forms should start arriving during this time as well. Those will require the new home buyer to read, understand, and sign them before sending them back to the lender for processing. Any questions or concerns during this phase should be addressed with the senior loan processor overseeing the transaction.
Sign the Assumption Agreement contract. If everything comes back okay, and the new borrower is given the green light, then there are a few more forms that need to be addressed. For starters, the last of the TILA-RESPA forms should be compared with the first set to make sure the costs are as expected.
Next up, the Assumption Agreement form seals the deal as far as the seller and the lender are concerned. Signing this document makes it official, the new home borrower is now officially able to take over payments on the seller’s original home loan.
Although the assumption agreement form finalizes the transaction, it is not the last thing to be done. The seller is still legally liable for the repayment of the loan, so it is always a good move to discuss and sign a release of liability form in order to free them from repercussion should the new home buyer default on a mortgage payment.
Close. The absolute last thing to be done is simple, attend the closing and enjoy the new home, and assumed mortgage payments!
Assumable Mortgages: In Review
Assumable mortgages may be hard to come by, but they have the capacity to be worthwhile for many home buyers. Assuming a mortgage means picking up where the seller left off; acquiring their original mortgage loan with the interest rate, principal balance, and repayment date intact (in most cases).
There are a ton of things to consider before deciding to assume a mortgage loan, most importantly the value of the home versus the amount left on the mortgage. This amount is the buyer’s responsibility to pay, and often times, it requires a second mortgage, which could heavily impact the potential savings of assuming a mortgage in the first place.
If the speedy, more relaxed process of assuming a mortgage is still appealing, don’t hesitate to give the experts at home.loans a call, and we will be more than happy to advise you on your best possible mortgage solutions!