We take on things that someone else has owned all the time. Think about it: used cars, antique furniture that just needs a good coat of chalk paint, and vintage designer bags. But what about mortgages? Yep, in fact, it’s possible to get a pre-owned home loan, or what’s called an assumable mortgage.
But why would someone want to take on someone else’s mortgage? Well, the major benefit is that a buyer can take advantage of financing with a better interest rate if rates are higher than when the seller originally bought the home. An assumable mortgage can be a smart money move, but it’s not always the best option, particularly because not all mortgages are assumable.
Here are the basics both buyers and sellers need to know:
What is an assumable mortgage?
An assumable mortgage allows a buyer to take over (or “assume”) the seller’s home loan. The buyer takes over the loan’s rate, repayment period, current principal balance, and any other terms, rather than getting a new mortgage.
The buyer will need approval from the lender who funded the original mortgage. Assuming the buyer is approved and the paperwork is processed completely, the buyer agrees to make all future payments on the loan, and the seller is released from any future liability.
An assumable mortgage allows a buyer to take over (or “assume”) the seller’s home loan, including the interest rate, repayment period, principal, and other loan terms.
What are the advantages?
If the terms of the seller’s existing mortgage are more attractive than what’s currently available in the market, an assumable mortgage may be right for you.
Say the seller bought their home back when interest rates were around three percent. If rates have risen to six or seven percent since then, a buyer could assume the seller’s mortgage and potentially save thousands of dollars in interest payments and closing costs.
It may sweeten the pot for buyers if your home comes with an assumable mortgage, especially if rates are much higher than when you bought the home. You might also have more negotiating power on price because of the deal the buyer would get from the assumption.
What are the disadvantages?
Since an assumable mortgage only applies to the balance remaining on the original loan, you’ll need to either pay upfront or take out a second home loan for the amount of equity the seller has built up in the home.
You’ll also need to qualify for the loan under the original loan’s lender. If that lender doesn’t approve you, you won’t be able to take over the mortgage.
Sellers could encounter liability issues if they’re not cleared from responsibility for the loan.
Make sure your lender can release you from liability before you allow someone to take over your mortgage. If you remain tied to the mortgage and the buyer defaults on the assumed loan, you don’t want to be on the hook for the payments or suffer a hit to your credit!
Are all mortgages assumable?
Typically, home loans that are guaranteed or insured by the federal government are assumable, including:
- FHA loans, which are insured by the Federal Housing Administration
- USDA loans, which are guaranteed by the Department of Agriculture
- VA loans, which are guaranteed by the Department of Veterans Affairs
Most Conventional loans aren’t assumable because they contain “due-on-sale” clauses that require that the loan’s balance be paid off when the property moves from seller to buyer.
How does the process work?
The lender who funded the original mortgage must approve the new buyer before it will sign off on the assumption. The lender checks the buyer’s credit score, credit history, and income as if they were the one applying for the original loan.
If the buyer is approved and the lender approves the transfer, the new buyer can close on the home and start preparing to move in.
What about costs?
There are fewer closing costs involved when a buyer assumes a mortgage. The FHA, VA, and USDA impose limits on assumption-related fees to help keep these home loans affordable.
The FHA and VA won’t require an appraisal on an assumable mortgage, but the VA does recommend an appraisal be completed during the deal. The USDA will want to verify that the property meets certain requirements before signing off on the assumable mortgage.
Still, the buyer may need to come up with a substantial down payment, especially if the seller has built up a lot of equity in the home.
What should I know about VA assumable mortgages?
Anyone can assume a VA loan, even those who aren’t a service member or served in the military.
However, the seller should know that with a VA loan, the government guarantees it will repay part of the balance if the borrower defaults. The VA calls this the borrower’s “entitlement.” Depending on the loan amount, the original borrower’s entitlement may remain in the home with the assumed mortgage, even after the sale.
If this happens, the seller may not have enough entitlement remaining to qualify for another VA loan to buy another home. Selling to a veteran or a fellow service member may be a better option: This way, the buyer can swap their entitlement for the seller’s.
What would disqualify me from an assumption?
If the buyer doesn’t have strong enough credit for the assumable loan, the lender won’t sign off on the deal. The buyer must prove that they can make the monthly payments. The seller must also show that they have been keeping up with their payments in order to transfer the property.
Can I assume a mortgage from a family member?
Not all assumptions are the result of home sales. In the cases of divorce or death, the spouse who remains in the home, or the heir, will need to prove they can make the monthly payments and meet the lender’s eligibility requirements before they can assume the mortgage.
Is it right for me?
An assumable mortgage may seem like an attractive option when interest rates are high because it could help you lock in a lower rate and drastically lower the cost of your home. However, this unconventional option is not for everyone.
Learn more about current interest rates and what home loan is best for your unique scenario by speaking one-on-one with a loan originator.