When people are planning to buy a home and they don’t have enough cash, they are planning to apply for some of the common types of mortgages. Most of them for one reason or another, fail to consider a type of mortgage called assumable mortgage. As the name implies, this is a type of mortgage in which the buyer can take over the seller’s mortgage. Stated differently, assumable mortgage is an agreement in which the outstanding mortgage balance, along with the repayment period, interest rate and other terms is transferred to the buyer. Meaning that the buyer is assuming the outstanding mortgage and its terms. Therefore there is no need for the buyer to take out a new mortgage. But keep in mind that lender approval is needed. The assumable feature is available with FHA loans and VA loans.
It could be stated that assumable mortgage is interesting instrument for financing your home purchase. Assumable mortgage is an interesting instrument because it allows you to acquire a mortgage originally approved to the seller. Worth mentioning is that in the past assumable mortgage was used often, and nowadays they are sporadic. They were often used in periods of rising interest rates. That is until the banks realized that they are loosing money, so to say. Namely, by transferring the original mortgage and its terms, you are not concerned about the current interest rates. This is so because you continue to make the payments of the original mortgage, and not a mortgage approved under the current market terms.
Going though the assumable mortgage explanation, you should also consider the different benefits and drawbacks of this type of mortgage.
Benefits of assumable mortgage
Interest rate on outstanding mortgage – might be lower than the current interest rate charged by banks. For this reason the buyer may want to take over the current mortgage instead of applying for new mortgage with higher interest rate. Attractiveness of assumable mortgage can increase in times of rising interest rates.
Lower closing costs – assuming a mortgage to buy a home can result in lower cost for the buyer.
Selling point – offering the possibility for assumable mortgage can be a way to attract more buyers, or to sell a property faster. Assumable mortgage possibility can be attractive for buyers because of the numerous benefits that come along with it.
Easier process – assuming a mortgage has much simple process than taking on a new mortgage. The process of changing it to a new buyer is fairly simple. The standard, time consuming, closing procedure is avoided. In addition, the hassle for property appraisal is usually avoided. Keep in mind that the lender should approve the new buyer as well.
Drawbacks of assumable mortgage
Limited possibility to select the lender – keep in mind that when assuming a mortgage you don’t have the possibility to choose a lender. Because of the need for a lender approval, you have to qualify and get approved by the issuer of the original mortgage. There could be a situation when the lender doesn’t give consent to the buyer. under this circumstance the process of assuming the mortgage can not be performed.
The level of seller’s equity – could influence the level of down payment. Meaning that, if the seller has high level of equity, then the buyer should make bigger down payment.
For instance, imagine a home selling for a $300,000, where the remaining mortgage balance is $120,000. This means that the buyer should have $180,000 to pay for seller’s equity. In simple words, the buyer should be able to cover the difference between the property price and mortgage amount. If the buyer doesn’t have the needed cash, he/she can take on another mortgage or loan in general. The new loan could have major impact on buyer’s financial situation.
Liability issues – although assumable mortgage can speed up the process of selling a property, it does has some liability issues. Namely, the seller could remain accountable for the debt after the mortgage is assumed. This means that in cases where the buyer fails to meet its monthly payments, the seller’s credit score might decrease. The seller should make sure that he/she is exempt from any liability issues after the loan is assumed.
Things you need to know for assumable mortgage
Not all mortgages are available as assumable mortgage. While in the past more types of mortgage were available as assumable mortgage as well, this is changed in today’s market. Because of tighter regulations and economical changes, assumable mortgage is hard to come by, but not impossible though. Most common types of loans offering assumable mortgage clause are FHA loans and VA loans.
It is worth mentioning that VA loans are associated with a veteran’s entitlement. Meaning that seller’s entitlement will continue to be associated to the loan even after the assumption process is completed. This means that the seller will not be able to utilize the entitlement for another mortgage. Exception to this is under the circumstance that the buyer (veteran) is using his/her entitlement to buy a home.
Know the type of loan and date for a FHA loan – while FHA loans offer the possibility for assuming, the process of assuming this type of loan depends on the date of original loan. Loans originated prior to December 1, 1986 can be executed under the “Simple Assumption Process”, without the need for credit check or approval from the lender. If the original mortgage is approved after the above mentioned date, the assuming process is performed under the “Creditworthiness Assumption Process”. Therefore, the buyer should be able to qualify for a new FHA loan and lender approval is needed as well.
Considering the advantages of assumable mortgage it is obvious that this type of mortgage can offer numerous benefits for both, the seller and the buyer. As a buyer you can benefit from lower interest rate and better mortgage terms.
But at the same time, it is followed by some drawbacks as well. For instance, depending on seller’s equity, you may have to pay higher amount as a down payment. Thus, before jumping into the process of assuming a mortgage, you should go through the details of the agreement. Moreover, maybe you should consider other available mortgages in order to be sure that you have chosen the most adequate type of mortgage.