What are Assumable Mortgages?
An assumable Mortgage is a home loan that can be transferred from the seller to be taken over or “assumed” by the buyer, becoming their responsibility to pay off. Of course, this requires the approval of the lender servicing the loan, and even then, not all loans are assumable.
With an assumable mortgage, the buyer typically must be in agreement to take on the loan as it was originated for the original borrower (the seller) including the loan terms and interest rate. There are some cases where the terms are modified slightly, but this is a rare occurrence.
Different Assumable Mortgage Loans
As we’ve mentioned earlier, not all mortgage loans are assumable. Currently, Assumable mortgages are typically only offered in the form of FHA Loans, VA Loans, and specific USDA loans. Conventional mortgages are not usually assumable, as most lenders institute a “due-on-sale clause, which stipulates that the loan balance must be paid in full at the time of sale or transfer of the property, obligating the seller to pay the remainder on the loan.
Benefits of an Assumable Mortgage
Assumable mortgages can be beneficial to both the buyer and the seller. As a seller, The sheer rarity of assumable mortgages on the market can actually attract buyers. On top of that, Assumable mortgages give the seller more wiggle room to negotiate price, since a lot of the fees associated with loan origination don’t apply to an assumable mortgage transaction.
For the buyer, an assumable mortgage could mean amazing savings. The home loan being assumed may be set with an interest rate that is lower than that of the current market rates, meaning a buyer could instantly be getting a great deal on a home, that they would not have been able to get through any other means. Additionally, assumable mortgages don’t have as many associated closing costs as traditional mortgages, meaning even more savings for the buyer (and potentially the seller!).
Drawbacks of an Assumable Mortgage
While assumable mortgages sound like an amazing deal all around, there are some drawbacks. For example, one thing to keep in mind about assumable mortgages is the value of the home. If the home’s value is greater than the amount of mortgage left to be paid, then the buyer must make up the difference in cash or by taking out a second mortgage, which could potentially negate the awesome savings (and entire purpose) of taking on an assumable mortgage in the first place.
Finding a second mortgage in this situation could prove difficult, as some lenders will not be willing to cooperate with the lenders of the original loan that was taken over by the buyer. In some cases, It may not even be permitted contractually. Defaulting on either loan could also lead to legal issues between all parties involved.
How to Assume a Mortgage
Taking on an assumable mortgage can be an ideal situation for many home buyers. Having the option of taking over payments on an existing loan instead of going through the process of finding and applying for a home loan that may not have rates and loan terms that work for you is a no-brainer. But what is the process behind assuming a home loan?
Taking over mortgage payments on an assumable mortgage requires more than just a signature and a handshake. Granted, it’s nowhere near as complicated as originating an entirely new mortgage, but it does have its own process you must follow. If you intend on assuming a mortgage, here are the steps involved:
Step 1: Qualifying for the Assumable Mortgage
The very first thing you should do is meet with the lender that originated the mortgage in question and make sure that you are able to assume the mortgage. FHA, VA, and USDA loan programs all have specific eligibility requirements that you as the buyer (and the party assuming the loan) must adhere to, just as the original loan recipient had to in order to obtain the mortgage. These are all things you should discuss with the lender in full so that there are no hiccups with the transaction and transition of loan responsibility.
We mentioned earlier that it is extremely rare to find an assumable conventional loan, but they have happened. If you find yourself discussing with a lender the possibility of assuming a conventional mortgage, adding a large down payment to the table is often times enough to get them to agree to the deal.
Step 2: Figure out the Cost of Assuming the Mortgage
Taking over mortgage payments sounds appealing because it is essentially easier than hunting for a home loan. But ease of access isn’t everything. You should always make sure you weigh the actual cost of assuming a mortgage before you agree to it.
The value of the home plays a major part in this step because you will become responsible for covering the value of any equity the seller has accrued in the home. For example, if the home is valued at $250,000, and the owner has an assumable mortgage value of $200,000, then you must come up with the remaining $50,000.
If you’ve had your down payment money saved up for just such a moment, then you might not have to worry too much, but naturally, most people don’t have that kind of money lying around. This is where an assumable mortgage can become expensive. Many people have to take out a second mortgage in order to cover the equity on the property, and plenty of times, the interest alone on the second mortgage is enough to ruin the potential savings of an assumable mortgage.
Lenders also reserve the right to alter loan terms on assumable mortgages, so make sure you have every detail provided for you to scrutinize, to make sure that assuming the mortgage is actually a worthwhile endeavor cost wise. Also bear in mind that you will be charged assumption fees, not unlike the closing costs on a new home loan. We highly recommend that you request all property tax documentation for the property at this time as well for your personal records.
Step 3: Apply to Assume the Mortgage
With all things considered, you will need to request an application from the lender, sometimes called the “assumption package”. Completing this application and turning in any required documents is pretty much the same as with any home loan. You will need to show proof of income and insight into your current financial situation. Some documents typically required are:
W-2 Tax forms
Documentation for any vehicles in your possession
Life Insurance information
Retirement account statements
You may also be asked to provide employment references from previous employers. You should save copies of your application for your personal records.
Step 4: Await and Cooperate with Follow Up from the lender
After your initial application is processed and the lender performs a “hard pull” of your credit history, you will be sent Real Estate Settlement Procedures Act (RESPA) documentation to look over, sign, and return. It is not uncommon to be contacted by the lender during this period to discuss any changes or clear up any red flags.
Step 5: Sign the Assumption Agreement Form
Assumption Agreements are to be read carefully and signed by the seller and the buyer, and sometimes the lender or government agency responsible for insuring the loan. On some occasions, this occurs even before the application is sent in, but it is best to save for after the approval of the buyer’s application.
Additionally, a Release of Liability form should be signed for the seller. This is to free them from any financial or legal obligation to the lender after the transaction is completed, should you default on your mortgage payments.
Step 6: Closing
Attend the formal closing to seal the deal by signing and finalizing all documentation, and the mortgage officially becomes your responsibility. Keep in mind that closing fees will be due at this time as well, although they are substantially less than the closing costs on a traditional mortgage closing.