Assumable Mortgages: The Secret to Affordable Homeownership

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When buying a house, the typical process involves choosing a lender and applying for a new mortgage. But imagine if you could take over someone else’s mortgage with a low interest rate.

That’s what we call “assuming” the mortgage. If the house you want to buy has an assumable mortgage, you can take over the existing loan. This might come with better terms than what you’d get with a new loan in the current market.

Let’s explore this option, how it works, and if it’s the right choice for you.

What is an assumable mortgage?

An assumable mortgage is a type of financing arrangement that allows a buyer to assume the seller’s existing home loan. Buyers often choose this option to capitalize on more favorable financing terms, particularly a lower interest rate, in cases where interest rates have increased since the seller originally obtained the loan.

How Does An Assumable Loan Work?

Taking over an assumable mortgage is similar to getting a regular home, but there are some key differences. When you assume a mortgage, you essentially work with the seller’s lender, provided the lender approves this arrangement. This means you inherit the seller’s loan, including the remaining balance, interest rate, repayment terms, and other contract terms.

One notable advantage of assumable mortgages is that they typically do not require a home appraisal, which can save you a lot of money. However, it’s still a good idea to get a home inspection to check for any needed repairs. Once you complete the purchase, the seller is no longer responsible for the mortgage payments.

If the house’s value exceeds the remaining mortgage balance, you’ll need to make a down payment equal to the difference between the sale price and the mortgage. In cases of a significant difference, securing a second mortgage might be necessary. This ensures you can enjoy the benefits of an assumable mortgage while adhering to the lender’s criteria and managing a smooth transition.

What Types of Loans Are Assumable?

Not all mortgages are assumable. In fact, the majority of conventional mortgages are not assumable. But, if you’re dealing with a loan insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA), it can be taken over as long as specific requirements are satisfied.

Buyers who want to assume a mortgage from a seller have to meet certain requirements and get approval from the agency that oversees the mortgage.

FHA loan

FHA loans are assumable if both parties meet the requirements. For example, the seller must have used the property as their primary residence.

To start the assumption process, buyers must verify that the FHA loan is assumable. The seller’s lender will verify that the buyer meets the qualifications, and if approved, the mortgage will be assumed by the buyer. 

The good news for buyers is that FHA loans require only a 3.5% down payment, which is great for first-time homebuyers. They’re also available to buyers with credit scores as low as 500.

VA loan

Backed by the Department of Veterans Affairs, VA loans are accessible to eligible military members, service members, and their spouses. However, buyers don’t have to be in the military to qualify for an assumable VA loan. Even if a buyer isn’t a qualified current or former military service member, they can still apply for a VA loan assumption.

In rare cases, buyers can freely assume any VA loan closed on or before March 1, 1988. In other words, the buyer does not need the approval of the VA or the lender to assume the mortgage.

USDA loan

USDA loans are available for buyers interested in rural properties. These loans come with the advantage of not requiring a down payment and typically offer low interest rates.

To take over a USDA loan, the buyer must meet the usual qualifications, which include meeting credit and income criteria, and gain approval from the USDA to transfer the title. The buyer can either assume the existing interest rate and loan terms or choose new ones.

However, it’s important to note that even if the buyer meets all requirements and receives approval, they cannot assume the mortgage if the seller is behind on payments.

The bottom line

Choosing an assumable mortgage is a smart move, especially when interest rates are climbing. However, it’s essential to note that if the seller has a lot of equity in the home, the buyer might need to make a significant down payment or secure an extra loan to bridge the difference between the sale price and the existing mortgage.

Keep in mind that not all loans are assumable, and even if they are, the buyer must still meet the agency and lender’s qualifications. If the benefits outweigh the risks, an assumable loan can be an affordable and beneficial option for homeownership in a high-rate environment.

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