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Used cars. Used furniture. Used clothes. These are all smart, money-saving purchases. The same idea applies to home buyers who take over, or “assume,” the seller’s mortgage at a lower interest rate than is available in your market. However, you can’t assume the mortgage, and the process isn’t as easy as taking out a loan yourself. Here’s how it works:
What is an Assumable Mortgage?
With an assumeable mortgage, a buyer can take over the interest rate, repayment term, current principal balance, and other terms of the seller’s existing mortgage rather than taking out a new loan.
The biggest potential advantage for a buyer is that the seller’s mortgage terms may be more attractive than the current terms of the buyer’s new mortgage application.
What types of mortgages can be assumed?
The main types of mortgages that can be underwritten are FHA loans, VA loans, and USDA loans.
- FHA Loans: For an FHA assumeable mortgage, you must meet standard FHA loan requirements, which include making a minimum down payment of 3.5 percent and having a credit score of at least 580.
- VA Loans: You don’t necessarily have to be a military member or veteran to underwrite a VA loan. If the loan originated before 1988, you don’t need the VA’s or lender’s permission to underwrite the mortgage. However, if the loan originated after 1988, you must have the lender’s approval to underwrite the loan. There is no minimum credit score, but lenders typically look for a score of 620 or higher. You’ll also have to pay a VA funding fee.
- USDA Loans: USDA loans are almost always assumed at new interest rates and terms, but there are some cases, such as transfers between family members, where you can assume the same interest rate and terms without meeting the qualification requirements. To assume a USDA loan, you typically need a minimum credit score of 620. You must also meet income limits and location requirements.
Can I carry over my conventional mortgage?
Most conventional mortgages, the most common type of loan, cannot be assumed. They contain clauses called payable on sale or payable on assignment clauses, which require the mortgage to be repaid in full whenever the original borrower sells the property or transfers the loan.
However, in special circumstances, you can assume a regular loan. To find out if you can assume a mortgage, check your mortgage contract to see if it has an assumption clause. This clause allows you to transfer your mortgage to someone else.
In most cases, the mortgage lender must approve the assumption, which usually means holding the new borrower compliant with loan-qualification requirements.
Assumable mortgages were common up until the 1980s. That changed with the passage of the Garne-Saint-Germain Act in 1982, which allowed lenders to enforce payment-on-sale clauses if a property changed hands. Previously, state laws could prevent such actions. However, the law provided exceptions when lenders could claim on a loan, often in the case of death or divorce.
How do assumeable mortgages work?
When you assume a mortgage, the current borrower transfers the remaining balance of the loan to you, and you become responsible for the remaining payments. This means that the mortgage terms will be the same as the previous homeowner’s, including the interest rate and monthly payments.
You will have to compensate the seller for the amount of the mortgage you paid off. This is part of the overall purchase price, but it must be paid immediately, essentially as part of your down payment. The money can come from your own pocket or be raised through a separate loan.
You may also have to pay an underwriting fee to the lender.
Assuming a mortgage after death or divorce
Mortgage assumptions can also occur outside of traditional real estate transactions. A family member (or sometimes a non-family member) can take over an existing mortgage on an inherited home. If sole ownership of the property is granted in divorce proceedings, that person can assume the full amount of the existing mortgage.
In both cases, underwriting is permitted even if the contract does not contain an underwriting clause or in the case of a conventional loan. In the case of an inheritance, the new borrower does not have to qualify for the loan if he or she is related by blood to the deceased.
The pros and cons of an assumer mortgage
Strong Points
- Buyers can get lower interest rates: For a buyer, the biggest benefit of assuming a mortgage is the ability to assume the seller’s lower interest rate (assuming interest rates were lower when the seller purchased the property), which can be an especially attractive outcome in a high interest rate environment.
- Sellers are likely to attract more offers: If you’re a seller and your mortgage interest rate is lower than market rates, you may be able to attract more buyers, especially if your home doesn’t have much equity in it.
Cons
- In most cases, buyers will not be able to afford a traditional mortgage. The only mortgage types you can assume are FHA, VA, and USDA loans. Plus, if you assume a USDA loan, you’ll likely get the new interest rate and terms instead of the seller’s lower interest rate.
- Buyers may not be able to find the option: It’s often difficult to know which homes have mortgage assumptions unless it’s stated in the property description or your real estate agent can find the information, and many sellers don’t go this route either.
- Buyers must qualify for the loan: Except in the event of death, you must have sufficient credit and financial capacity to repay the loan you wish to assume.
- The buyer must pay the seller their share of the stock: You take over the seller’s mortgage and pay it off over time, but you only assume the outstanding balance. You’ll need to pay the remaining cost of the home to the seller, either out of pocket or with a separate loan.
- The seller may still be liable for the debt: If the buyer doesn’t make payments and the lender doesn’t fully forgive the debt, your credit could take a hit.
How to Underwrite a Mortgage
To take over another borrower’s mortgage, follow these steps:
- Check if your loan can be taken over – Check whether the loan can actually be assumed. It’s also a good idea to speak with the current mortgage holder’s lender and verify directly that an assumption would be allowed and that the loan is in good standing.
- Prepare for expenses – You will need to pay a down payment, the amount of which will vary depending on how much equity the seller has. Once your assumption is approved, you will also need to pay closing costs, but assumption costs are generally lower than if you were to take out the mortgage yourself.
- Submit your application – The process for underwriting a mortgage varies by lender, but generally involves filling out an application, providing proof of income and assets, and undergoing a credit check.
- Sign and close the disclaimer – If the assumption is approved, you’ll have to fill out paperwork just like you would when closing on any other type of mortgage. This may include signing a release of liability acknowledging that the seller is no longer responsible for the mortgage.
