What is an Assumable Mortgage?
When you’re looking to buy a house it’s going to cost you a lot of money and that means you’re going to need to pay attention to how you can afford it. For most people, affording a house means that they need to go to a bank and get what’s called a mortgage. On the other hand, that traditional mortgage is not the only thing you can do. You can also get what’s called an assumable mortgage.
One of the best reasons to go for this type of mortgage is if interest rates have risen since the time that the original mortgage was taken out. In this case the buyer is able to get all of the benefits of that mortgage. After all, higher interest rates mean higher cost when it comes to borrowing. When the buyer is able to take over the current mortgage they’re going to save more money on payments. Unfortunately, that means the full cost is not covered with the mortgage and there may be a requirement for additional down payment or financing to cover the purchase price.
Let’s say a seller has a current mortgage of $200,000 but their house is selling for $270,000. In that case, the buyer is only going to be able to assume the $200,000 mortgage, but they need to come up with another $70,000 to buy the house. That could mean an additional mortgage or new financing at the current interest. Also, even though the mortgage is being assumed, that doesn’t mean that the lender can’t make at least a few changes to the current rules of the loan. The credit of the buyer and the market conditions in the area will play a part in this.
You Can’t Assume Just Any Mortgage
Back in the 70’s and 80’s these types of mortgages were actually extremely popular, but they’ve lost a little of their popularity over the years. Part of the reason is that there are now tighter regulations and economical changes. Still, there are plenty of situations where you can get one, and they happen a lot with FHA loans and VA loans.
The buyer must be assuming a federally guaranteed or insured mortgage. So, you may be able to assume:
- FHA loans, insured by the Federal Housing Administration.
- VA loans, insured by the Department of Veterans Affairs (even if the buyer is neither a veteran nor a member of the military).
- USDA loans, insured by the Department of Agriculture.
What You Need to Know About that Assumable Mortgage
For many people, this type of mortgage makes sense because it gives you several benefits, but there are things you should take a closer look at. Of course you need to pay attention to the type of mortgage you’re getting and the interest rates as well as what you’re going to need to do in order to get the rest of the money. But take a look at these things as well:
Evaluate the Details
Don’t just take the seller’s word that you can assume the mortgage they have, or how much they owe. You want to make sure you get a copy of all of the information, including a copy of the mortgage and the beneficiary statement. Look at how much the difference is between what’s owed and what you can do to pay that money.
Rates for Interest
You’re going to want to look closely at what the loan rates are. If the rate right now is higher than what the loan has then you’re going to save a great deal of money. In fact, if you can get an interest rate of 5% instead of 7% you could save $257 a month, which is going to be a lot of money over a period of several years.
When it comes to TRID requirements, which are mandated by the federal government, there are specific rules required. One of those is that borrowers are required to receive a Loan Estimate from the lender. This explains the costs that are going to happen when it comes to taking over the mortgage. There are going to be a lot of fees associated, but in general the fees will be more when it comes to getting a new loan instead of taking over the original. You could end up with a huge difference of several thousand dollars. Make sure your statement includes things like:
- Fees for application
- Credit report fees
- Appraisal fees
- Prepaid interest charge
- Underwriting fees
You Must Get Approval
You don’t get to just assume a mortgage whenever you want. Also, you still have to be approved for the loan by the lender just as if it was a brand new mortgage. If the lender doesn’t approve then you’re not going to get the loan. This also means you have to use the same mortgage company that the original borrower used.
On the other hand, you’re generally not going to be required to get a new appraisal. That means you’ll have an easier time closing the deal and you’re going to save a little on fees since you don’t have to pay this one. You still can get an appraisal if you want to though, to make sure that you’re not paying more than the property is work.
Make sure also that you have an idea of the equity on the loan, which is the part you’ll need as an independent loan or a down payment.
Release of Liability
When you start looking at this type of mortgage, however, it’s important that you make sure everything is done correctly. If it isn’t, the seller could actually still be held responsible for the mortgage.
That would mean that if the buyer defaulted the lender could actually go after the seller to get their money. Make sure that you’re following through on all the paperwork and that you’re getting a release from the lender that proves you are no longer responsible for the mortgage in any way.
Benefits of Taking Over the Seller’s Loan
The truth is it’s not just the buyer that’s going to get a lot of benefits with this type of mortgage. A seller can actually get some benefits as well. That’s especially true if the interest rate that’s currently on the loan is actually lower than what the buyer would get with a new loan. Think about it, if the current rate is 7% and the old loan is at 5% that means the buyer is saving hundreds of dollars every month.
Next, there aren’t going to be as many closing costs, which benefits the buyer because it saves money. It also benefits the seller because they can likely get a better deal with the buyer for the purchase price.
What’s really great for everyone is that when you assume a mortgage it’s a very simple process, a lot easier than getting a whole new mortgage. And that means there’s less time involved and there’s not a requirement for a property appraisal either. All of that is going to make things a whole lot easier to get through. When it comes to the seller, they actually have an upper hand on the market. Not just any mortgage can be assumed, but with the benefits that come along with it, that could be an asset. It could make a homeowner more interested in buying the house.
Potential Risks of an Assumable Mortgage
As with anything, there will be situations where this isn’t the best option. For a buyer, it’s important to look at the purchase price versus the amount of the mortgage. Is there going to be a down payment or some type of financing required outside of the assumable mortgage?
The $200,000 house we talked about earlier, with the $270,000 purchase price is one example. The buyer would need to come up with $70,000 in cash or additional financing in order to buy the house. That extra money could be at a much higher interest rate than the mortgage.
A second loan generally means a second mortgage company and that could make it difficult to get everything sorted out. The two companies may not want to communicate with each other or they might be reluctant to take on this kind of arrangement. For the buyer it becomes more of a hassle and not so much of a benefit anymore.
When it comes to the seller there is always the possibility of being held liable for a mortgage that has already been passed over to someone else. If the buyer defaults it could come back on the seller and that’s definitely not something they want to deal with. Getting a written copy of the release of liability from the mortgage is essential to prevent this.
Finally, you should know that Federal Housing Administration loans and Veterans Affairs loans can be assumed, but most conventional loans can’t.
When it comes down to it, it’s entirely possible that an assumable mortgage will be the best option for you. It’s all going to depend on interest rates and the type of mortgage that you’re getting as well as how much the purchase price is versus the assumed mortgage cost. Just make sure you talk with the lender and see if everything is going to work out best for you this way.