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? Imagine an option that allows the buyer to skip the pesky mortgage application process and inherit the previous homeowner’s mortgage responsibilities. Thankfully, that option exists and is called an assumable mortgage.

 

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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 elimates the additional stress of applying for a new mortgage. The remaining balance, mortgage rate, repayment period, and other loans remain the same, but the debt is unfortunately also transferred to buyers.

 

Which Mortgages are Assumable?

All Federal Housing Administration (FHA) loans are generally assumable. For loans conceived after December 15, 1989, the lender must approve the sale if the buyer is deemed creditworthy. Under exceptional circumstances, such as death or inheritance, the lender is not entitled to check the buyer’s credit and doesn’t have to approve the sale.

All Veteran Affairs (VA) loans are assumable, but these loans come with additional rules and qualifications. Loans originated before March 1, 1988, are considered “freely assumable” and do not require approval from anyone. 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. Additionally, certain closing costs are capped on assumable mortgages. 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.

 

Is an Assumable Mortgage Right for You?

Overall, an assumable mortgage can be a great choice for buyers trying to ease additional stress and save money. 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.

 

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