Article Excerpt
It’s sometimes possible to assume a seller’s mortgage instead of getting a new loan. Learn more about whether an assumable mortgage is a good idea.
Assuming a Seller’s Mortgage
It’s sometimes possible to assume a seller’s mortgage instead of getting a new loan. Learn more about whether an assumable mortgage is a good idea.
Buying a home typically requires applying for and obtaining a mortgage loan to finance a large part of the purchase price.
The buyer makes a down payment, and the mortgage lender provides the rest.
The money goes into escrow.
At closing, the escrow agent uses the money received from the buyer and the lender to pay off the seller’s mortgage.
The seller receives whatever money is left.
Read more: What’s a Mortgage Escrow Account? Do I Need One?
This is how most home purchases work, but there are other possibilities. In some situations, a buyer may be able to assume the seller’s existing mortgage. The buyer takes over the seller’s mortgage payments, and the seller receives the value of their equity in the home. An assumable mortgage could have advantages for a buyer, but it also has notable drawbacks.
What is an assumable mortgage?
An assumable mortgage is a financing agreement where a lender transfers an outstanding loan from the current homeowner to a buyer. The terms of the mortgage, including the interest rate.\, typically remain the same.
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How does an assumable mortgage work?
A prospective homebuyer must apply to the seller’s lender in order to assume the seller’s mortgage. The buyer must meet all of the same requirements that the seller had to meet in terms of creditworthiness, such as credit score, income, and debt-to-income ratio (DTI). The lender may charge the buyer a processing fee.
Many mortgages include a “due on sale” clause, which states that the entire balance of the loan comes due when the owner sells the home. In most home sales, this is not a big deal because the escrow agent will pay off the loan immediately after closing. A seller who wants to sell their home to someone who will assume the mortgage must get the lender’s permission so they don’t trigger the due-on-sale clause.
If the seller’s lender approves the buyer’s application, the sale of the home may go through. At closing, the seller signs a warranty deed transferring title to the home to the buyer. The buyer must sign a loan agreement and other documents assuming the existing loan. They must also bring enough money to cover the seller’s equity.
The buyer’s assumption of the mortgage does not release the seller from responsibility for loan payments. The lender must release the seller from liability in writing at the time of closing. At that point, the buyer owns the home and is responsible for paying the mortgage. The seller is no longer on the hook.
What kinds of mortgages are assumable?
Whether a conventional mortgage loan is assumable or not is largely up to the lender. The loan agreement could allow a buyer to assume the loan if they meet the same qualifications as the seller, or it could specifically prohibit assumption. Loans offered through the FHA, VA, and USDA are assumable if the buyer and seller meet several criteria.
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Assumption of FHA Loans
Mortgage loans insured by the Federal Housing Administration (FHA) are assumable. Before December 1, 1986, the assumption of an FHA loan had no restrictions. For loans issued after that date, the buyer and seller must meet several criteria to qualify for the assumption. The specific restrictions may vary from one FHA loan to another, but they typically include:
The creditworthiness of the buyer
Use of the property as a primary residence
Read more: FHA Loan Requirements & Benefits
Assumption of VA Loans
Loans insured by the U.S. Department of Veterans Affairs (VA) are also assumable. Any loan issued before March 1, 1988, may be assumed without the VA’s approval, although in that situation the seller would remain liable for loan payments until the VA releases them. Loans issued after that date are subject to restrictions:
The loan is current, or the seller will bring the loan currently on or before the closing date.
The buyer meets the VA’s standards for creditworthiness.
The buyer agrees to assume all of the seller’s obligations on the loan.
Read more: VA Loan Requirements & Benefits
Assumption of USDA Loans
The U.S. Department of Agriculture (USDA) allows buyers to assume Single Family Housing Direct Home Loans, also known as Section 502 loans, subject to some restrictions. In most cases, a buyer who assumes a seller’s existing USDA loan will not have a new interest rate and other loan terms.
An assumption of a USDA loan with the existing interest rate may only take place in specific types of transfers by the current borrower. Some transfers may occur during the current borrower’s life:
To a spouse or child
To a current or former spouse as part of a divorce decree or separation agreement
To a living trust established by the borrower, when the borrower intends to continue living in the home
Other approved transfers may only occur upon the borrower’s death:
To a relative or co-owner of the property
To someone other than the borrower’s spouse who will assume the loan for the benefit of the borrower’s dependents, provided that the dependents continue to live in the home
Read more: USDA Loan Requirements & Benefits
Pros And Cons of Assumable Mortgages
Assuming a mortgage is most advantageous when interest rates are high. With many types of mortgages, a buyer assuming an existing loan keeps the same interest rate that the seller had. This rate could be significantly lower than the rates that are available at the time of the sale and assumption.
A major disadvantage of mortgage assumption is that the buyer is responsible for paying the entire amount of the seller’s equity. If a home’s sales price is $250,000, and the mortgage balance is $100,000, the buyer must come up with $150,000. This may require the buyer to obtain a second mortgage, which would offset the main benefit of assuming the mortgage in the first place. The best scenario for assuming a mortgage, from a buyer’s point of view, is when a seller’s equity is low, such as when a $250,000 home has a $225,000 mortgage balance.
Photo by Birgit Loit on Unsplash
Get Guidance From The Pros
If you have questions about the best way for you to get financing to buy a home, the mortgage professionals at the Wood Group of Fairway are here to help. We’ll help you find mortgage options that will work for your particular situation. Get in touch today, and an advisor will reach out directly.
