For prospective homeowners, there are a plethora of loan options available. The decision-making process to find the perfect terms can be quite overwhelming and stress-inducing. Conventional loans, Jumbo loans, Fixed-rate loans, Government-insured loans, and the list goes on. So where does a prospective homeowner start? While there are traditional loan options, an assumable mortgage allows the buyer to apply for the assumption of the previous homeowner’s loan. But how does this process work exactly?
What is an Assumable Mortgage?
An assumable mortgage allows the buyer to purchase a home by taking over the seller’s existing mortgage loan. This allows buyers to bypass the traditional mortgage process and take over the previous owner’s mortgage. However, assumption is not a free pass, buyers are required to go through a different mortgage application process. Buyers should be aware that the seller will not want to allow an assumption unless you are deemed creditworthy by the lender and allow the seller to be released from the liability of the repayment of the loan. The remaining balance, mortgage rate, repayment period, debt, and other loans remain the same and are transferred to buyers.
Which Mortgages are Assumable?
All Federal Housing Administration (FHA) loans are generally assumable. “For a mortgage where the application was signed on or after December 1, 1986, the loan may be assumable depending on a creditworthiness review of the assumptor(s).” In these cases, the FHA loan assumption approval should not be taken for granted any more than the original mortgage loan was; the lender is, similar to the original mortgage, required to make sure the buyer is an acceptable credit risk. The person assuming the FHA loan should prepare for the transaction the way any home buyer would for a typical loan application.
All Veteran Affairs (VA) loans are assumable, but these loans come with additional rules and qualifications. Loans originated after March 1, 1988, are assumable: if the lender approves, the buyer is considered creditworthy, and the processing fee is paid. Borrowers typically must be active-duty service members, veterans, or surviving spouses to be eligible for a VA loan. However, the person assuming the loan isn’t necessarily required to be affiliated with the military.
U.S Department of Agriculture (USDA) loans are assumable in 2 ways: 1) new rates and terms or 2) the same rates and terms. Most loans are assumable with new rates and terms. This transfers the responsibility for the mortgage debt to the buyer but adjusts it. Continuing the same rate and terms is only available under special circumstances, such as family members exchanging the title of a property. In these situations, the rates and terms are conserved and there is no review of the buyer’s creditworthiness or property appraisal required.
Traditionally, conventional loans are not assumable. Mortgage contracts contain a due-on-sale clause; this allows lenders to demand you pay the entire remaining amount immediately after the property is sold. However, if you meet certain financial qualifications and retain a conventional adjustable-rate mortgage, it’s possible to make your mortgage eligible for assumption.
Benefits of Assumable Mortgages
If the mortgage rate increases, an assumable mortgage provides lower interest rates for buyers. As a seller, your property experiences a boost of desirability that will attract buyers. Normally, there is no appraisal needed when selling or transferring an assumable mortgage—which can potentially save buyers hundreds of dollars! Lastly, a buyer is likely to take out a loan for a smaller amount than a loan with a traditional mortgage.
Drawbacks of Assumable Mortgages
Due to credit, income, and loan requirements, not everyone can assume a mortgage. A buyer may experience a higher down payment depending on the seller’s equity. Moreover, there is a chance for buyers to get stuck with additional loan fees or ongoing mortgage insurance payments. Lastly, buyers are limited to the original terms and conditions of the seller’s lender; this restricts their ability to search for more competitive rates and/or terms.
So, while an assumable mortgage seems like a great way to save money and reduce stress, the process of obtaining a release of liability can be just as cumbersome as going through the mortgage loan process yourself, the difference is that you do not need to pay for the appraisal or loan policy.
Sellers be aware! Sellers should always pursue a release of their liability from the repayment of the loan. If not, they are still obligated along with the lender. If the lender must foreclose against the new buyer, they drag the seller along as well.
Is an Assumable Mortgage Right for You?
Overall, an assumable mortgage can be a great choice for buyers who are willing to go through the process. However, this option is not made for everyone and there are potential risks to be aware of. We hope that this blog was informative in your decision-making process, but if you still have questions, the Metropolitan Title team is here to help.