Assumable Mortgage | What Is It and How Does It Work?

In the ever-evolving world of real estate and financing, assumable mortgages offer a unique option for homebuyers and sellers alike. While assumable mortgages are not as common as they once were, understanding their potential advantages and intricacies can potentially open doors to new opportunities for those looking to buy or sell a home. Let’s take a closer look at assumable mortgages, what it is, and how it works.

What is an Assumable Mortgage?

An assumable mortgage is a type of mortgage loan that can be transferred from the current homeowner (the seller) to the buyer of the property. In other words, the buyer can assume the responsibility for the existing mortgage on the property, taking over the remaining loan balance, terms, and interest rate from the seller.

There are two main types of assumable mortgages:

Qualified Assumption
With a qualified assumption, the buyer must meet the lender’s qualification criteria and go through a formal approval process. Much like applying for a new mortgage, a buyer will need to submit financial documentation to the lender, such as recent pay stubs, W-2 forms, tax returns, and employment verification. The lender will then evaluate the buyer’s creditworthiness, income, and other factors to determine if they are eligible to assume the seller’s existing mortgage.

If approved, the buyer can take over the seller’s mortgage with the current terms. The lender will then provide the necessary documentation and consent for the assumption to proceed. In some cases, the terms of the assumed loan may be modified or reaffirmed based on the buyer’s financial situation. This process typically involves negotiation between the buyer, seller, and lender to agree on any changes to the loan terms.

Non-Qualified Assumption
With a non-qualified assumption, the buyer takes over the mortgage without going through a formal approval process with the lender. In this type of assumption, the lender does not assess the buyer’s creditworthiness, income, or other financial factors to determine eligibility.

Instead, the buyer assumes the mortgage based on an agreement with the seller, typically outlined in an assumption agreement. Non-qualifying mortgage assumptions are less common, pretty much non-existent, and usually occur when the mortgage contract includes an assumable clause.

It’s important to note that while the buyer may not need to qualify, the lender’s consent is still required for the assumption to proceed. Additionally, the seller will most likely remain jointly liable for the mortgage if the buyer defaults on payments or fails to fulfill their obligations. The specifics will vary and depend on the terms of the mortgage assumption agreement along with the lender’s policies.

What Types of Mortgages Are Assumable?

Not all mortgages are assumable, the eligibility will vary and depend on the type of loan along with any clauses it may include. However, the three primary types of mortgages that may qualify are as follows:

FHA (Federal Housing Administration) Loans: FHA loans are government-backed mortgages and are generally assumable.

VA (Department of Veterans Affairs) Loans: VA loans are guaranteed by the Depart of Veterans Affairs and are only available to eligible veterans, active-duty service members, members of the National Guard and Reserves along with certain surviving spouses. Like FHA loans, most VA loans are assumable, subject to lender approval, and meeting specific requirements.

USDA (United States Department of Agriculture) Loans: USDA loans provide financing options for rural and suburban homebuyers and can usually be assumable. They’re guaranteed by the Department of Agriculture, however, just like other types of assumable loans, qualification and approval processes apply.

It’s crucial to note that conventional mortgages unless they specifically include an assumable clause, are generally not assumable.

Who Can Assume a Mortgage?

Generally, anyone who meets the qualification criteria set by the lender can assume a mortgage, but the specific eligibility and what is required to assume a mortgage will vary.

An assumable mortgage allows the buyer to take over, or assume, the sellers existing home loan, but not all loans qualify. Let's take a closer look! #assumablemortgage #realestate Click to Tweet

How Much Does It Cost To Assume a Mortgage?

While assuming a mortgage can potentially save on certain costs associated with obtaining a new loan, there are still expenses involved with assuming a mortgage. Some of these common costs may include an assumption fee, which is typically paid to the lender for processing the assumption paperwork. There may also be closing costs involved in the transfer of ownership and recording of the assumption.

Additionally, the buyer will be responsible to cover any difference between the purchase price of the property and the loan balance. This means if the sales price of the home is $600,000 and the mortgage being assumed is $400,000 the buyer needs to come up with the $200,000 balance. If the buyer doesn’t have the $200,000 in cash to put down at closing they would need to obtain a second mortgage.

Either way, bringing or mortgaging an additional $200,000 to closing may negate the whole purpose of assuming a mortgage, which is to save money. At that point, it might be more cost-effective for the buyer to apply for a new mortgage, even at a higher interest rate.

It’s also important to note if the buyer needs to finance any portion of the $200,000 balance they will need to let both lenders know. This includes the lender processing the mortgage assumption application because they will need to know where the $200,000 is coming from along with the lender processing their second mortgage application. Both lenders will take the other loan into consideration when determining the buyer’s loan eligibility.

How To Assume a Mortgage

Assuming a mortgage involves several steps, which usually include the following:

1. Verify Assumability: Not all mortgages are assumable, so first and foremost, confirming the mortgage can be assumed is the first step.
2. Understand the Cost: If the mortgage is assumable the next step is to find out all of the fees and costs associated with assuming the mortgage. This includes closing costs, a down payment, and the funds to cover the balance due between the sales price and the current mortgage.
3. Agreement Between Buyer and Seller: The buyer and seller need to negotiate the terms of the sale. The terms generally include the purchase price for the property, escrow amount, any contingencies, like a home inspection, contingency periods, and closing date along with any additional terms or agreements, such as assuming the existing mortgage.
4. Draft an Assumption Agreement: Prepare an assumption agreement that outlines the terms of the assumption. This legally binding document should include details such as the loan balance, interest rate, payment schedule, and any other relevant conditions.
5. Lender Qualification and Approval: Depending on the type of assumable mortgage and the lender’s requirements, the buyer will most likely need to qualify for the assumption. This process may involve credit checks, income verification, and other financial evaluations. The lender will assess the buyer’s ability to repay the loan and will then approve or deny the assumption.
6. Assumption Agreement: If the buyer is approved an assumption agreement is prepared. This document outlines the terms of the assumption, including the loan balance, interest rate, remaining term, and any specific conditions or restrictions.
7. Closing: Next, it’s time for the seller to transfer ownership along with the mortgage to the buyer. Both parties will need to sign all closing documents and the buyer will need to pay all of their closing expenses. These costs can include the down payment and closing costs, which may include fees to assume the mortgage.
8. Notify the Lender: After the closing, the lender should be notified ensuring that future mortgage statements are sent to the buyer. From that point forward the buyer takes over the responsibility of making mortgage payments.

The specific steps and requirements for assuming a mortgage will vary, so it’s important for both parties to find out what the exact steps are.

Assuming a Mortgage After Death or Divorce

While assuming a mortgage after death or divorce can be a complex process it might be possible. In the case of death, if the deceased borrower was the sole owner of the property, the mortgage may be transferred to a surviving spouse or heir through a legal process called probate. The new owner may potentially be able to assume the mortgage and continue making payments.

In divorce situations, a mortgage assumption may involve one party taking over the loan and becoming solely responsible for the mortgage payments. This typically requires the lender’s approval for assumption and if assuming the mortgage isn’t possible, refinancing the mortgage in the assuming party’s name might be.

Both scenarios may involve legal documentation, negotiation with lenders, and potential financial assessments. It’s important to understand the specific requirements and procedures involved in assuming a mortgage because they will vary.

An assumable mortgage allows the buyer to take over, or assume, the sellers existing home loan, but not all loans qualify. Let's take a closer look! #assumablemortgage #realestate Click to Tweet

PROs and CONs of Assumable Mortgages

Is it a good idea to assume a mortgage? Assumable mortgages present various advantages and disadvantages for both buyers and sellers. Let’s explore the pros and cons:

PROs of Assumable Mortgages:

1. Favorable Interest Rates: Assumers can take advantage of assumable mortgages when current interest rates are higher than the rate on the existing loan. This can result in substantial interest savings over the life of the loan.
2. Reduced Closing Costs: Assuming a mortgage eliminates the need for a new mortgage application, origination fees, and certain closing costs associated with obtaining a new loan. This can significantly reduce the upfront expenses for buyers.
3. Easier Qualification: For qualified buyers, assuming an existing mortgage can be an easier process than qualifying for a new mortgage. This can benefit individuals with lower credit scores or those who may face challenges meeting the stringent requirements of new mortgage applications.
4. Attracting Buyers: For sellers, offering an assumable mortgage can make their property more attractive to potential buyers, potentially expanding the pool of interested parties. This can be particularly beneficial in a market with higher interest rates or when traditional financing options are limited.

CONs of Assumable Mortgages:

1. Limited Availability: Assumable mortgages are less common and rarely exist in today’s real estate market.
2. Lender Approval: Assuming a mortgage still usually requires lender approval, and there is no guarantee that the buyer will be approved.
3. Existing Loan Terms: Buyers inherit the terms and conditions of the original mortgage. If the assumable mortgage has unfavorable terms, such as higher interest rates or restrictive clauses, it may not be as advantageous as obtaining a new loan with more favorable terms.
4. Seller Liability: Although the seller is relieved of future mortgage payments after the assumption, they may still be liable if the buyer defaults on the loan.

Final Thoughts