While it is most common to get pre-approved, shop for a home, and apply for an original mortgage, in some cases, a homebuyer can assume a homeowner’s mortgage balance and take possession of the property. This is known as an assumable mortgage.
An assumable mortgage allows you to find a house that you want to buy and take over the seller’s existing loan without applying for a mortgage of your own. The remaining principal balance, mortgage interest rate, remaining repayment period, and other terms will remain the same, with the responsibility for the remainder of the debt transferred to the new buyer. In addition, the new buyer must be credit-worthy.
How Does a Mortgage Assumption Work?
While a mortgage assumption allows a buyer to acquire the original loan terms and remaining loan balance, any equity that has been earned is not included. The difference between the home’s value and the original balance, or home equity, may need to be paid for by the assuming buyer to the seller.
Which Mortgage Loans are Assumable?
Not all loans are assumable. Unfortunately, conventional mortgages are not usually assumable. However, government-backed loans that are insured by the Federal Housing Administration (FHA), or backed by the Department of Veterans Affairs (VA) or United States Department of Agriculture mortgages (USDA or RD) are assumable if certain requirements are met. The seller must get approval from their lender for an assumption to take place.
Assumable FHA Loans
FHA loans, as long as the new borrower is credit-worthy, an assumption is fairly straightforward. Newer FHA loans require that the seller must live at the property as a primary residence for a specific amount of time. The buyers will still go through the standard application process for an FHA loan and need to provide employment and income documentation.
Assumable VA and RD Loans
Although it is not very common to find, VA loans that were originated before March 1st ,1988 are freely assumable. In order to assume a VA loan originated after March 1st, 1988, the borrower will need to demonstrate VA loan eligibility and creditworthiness. Rural development (RD), or USDA mortgage property must still meet USDA's parameters. The buyer must meet USDA's income and debt-to-income ratios as well as be creditworthy. One benefit of assuming an RD loan is you don't have to pay the 1% guarantee fee required on a new loan.
What Are the Benefits of an Assumable Mortgage?
Assuming a mortgage offers several benefits, especially when interest rates are high.
- Homes Are Easier to Sell
Assuming a mortgage can provide buyers with a simplified home buying process and potentially a lower interest rate.
- Homebuyers Save Money
Through mortgage assumption, you may be able to take advantage of the pre-existing interest rate. Mortgage assumptions typically don’t require an appraisal as there isn’t a new mortgage being originated. However, a home inspection is strongly encouraged. If you do need to take out a loan on top of the assumed mortgage, it will likely be lower than if you were to apply for a mortgage for the same property. Furthermore, closing costs may be lower for an assumed mortgage.
Cons of an Assumable Mortgage
Assuming a mortgage has many benefits, however, there are certain drawbacks that can come with the process.
- Lack of Financing Options
When assuming a mortgage, buyers are limited to the original terms and conditions of the seller's lender, eliminating their ability to search for more competitive rates or terms.
- Possibly Larger Down Payments or Secondary Loans
Lenders will still vet a borrower’s credit and income data in order to release the original borrower. Depending on the equity of the property, a larger down payment or secondary loan may be required in order to assume the loan. Assumption fees may also be required based on the lender’s policies, and the loan type.
For over 90 years homebuyers and homeowners have used the expertise of Standard Mortgage (NMLS#44912). For everything from purchasing to refinancing your primary residence or a second home or investment property, the team of loan officers and mortgage servicers is here to help.
