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    An assumable mortgage is when the buyer takes over, or “assumes”, the seller’s home loan. Some considerations must be taken into account to understand how assumable mortgages work. The seller and buyer must both agree to consider and negotiate an assumable mortgage. Buyers must consider the lender’s requirements and specific loan qualifications once the seller agrees to move forward with an assumable mortgage.

    The pros and cons of assuming mortgages rely heavily on the market interest rates and the home’s equity. If the market interest rates are higher than the locked-in rate of the current mortgage, buyers should consider loan assumption as a valuable option.

    In this post, we go into more detail about what an assumable mortgage is and how it works and discuss the types of assumable loans currently available. By weighing the pros and cons of assuming a mortgage, you can determine whether this is the best route for you as you navigate the path towards homeownership.

    KEY TAKEAWAYS

    • An assumable mortgage is when the buyer and seller enter into an agreement and the home loan is transferred over, or “assumed”, by the buyer, allowing the buyer to essentially skip the process of applying for a new mortgage.
    • An assumed mortgage can be advantageous to the buyer if current interest rates are higher than the rate on the mortgage being assumed and the seller has low home equity.
    • A disadvantage of an assumable mortgage is if the market value of the home is significantly higher than the remaining mortgage balance, requiring the buyer to make a hefty down payment or obtain a second mortgage.
    • Government-backed loans, such as VA loans, FHA loans, and USDA loans, can often be assumable, but their terms and conditions vary.

    What Is an Assumable Mortgage?

    An assumable mortgage is a type of home loan that can be transferred from the current owner of a home to a prospective buyer. Assumable mortgages allow buyers to take over the current home loan instead of securing a new loan to purchase a house. This can be particularly advantageous for buyers if interest rates are higher than the rate on a home’s current mortgage because they can take on that lower interest rate rather than applying for a new mortgage, which will likely come with a higher rate. 

    Not all home loans qualify as assumable mortgages. There are different types of qualifications and requirements that vary by lender in order for prospective buyers to “assume” the mortgage. Federally-backed loans, such as VA loans, FHA loans, and USDA loans, often qualify as assumable mortgages. Some conventional loans may qualify as an assuming mortgage as well depending on their terms and conditions. Consult with a Griffin Funding representative to discover if specific loans can be assumed or not.  

    An assumable mortgage is different in formality and liability compared to a “subject-to” mortgage. While both loans essentially allow the buyer to step into the shoes of the seller and take on the current home loan, subject-to mortgages do not require lender approval and the seller ultimately remains liable if the buyer stops making the mortgage payments.

    Without any legal obligation, a subject-to mortgage can be more flexible in the terms, but is riskier for sellers. Assumable mortgages require lender approval and ultimately release the seller from the mortgage, making them no longer legally responsible for making payments.

    How Does an Assumable Mortgage Work?

    Once verifying loan assumption, the buyer can begin the process of taking over the existing mortgage from the seller. The two parties agree on the loan assumption, sale price, deposit, and other terms as part of the home purchase agreement. An assumption application is typically submitted from the buyer to the lender of the assuming mortgage. The buyer’s financial situation and creditworthiness plays an integral part in this process of assuming mortgages.

    A young black couple sits at a table and speaks with their mortgage lender.

    After receiving approval from the lender, the buyer and seller enter into the assumption agreement, which includes the buyer taking over the principal balance, the interest rate, and repayment period. The buyer pays the seller the agreed purchase amount and the remaining mortgage is then transferred over. 

    Pros and Cons of Assuming a Mortgage 

    Buyers should carefully investigate the advantages and disadvantages of assumable mortgages to analyze the best choice based upon their financial situation. An assumable mortgage comes with pros and cons that both the buyer and seller should consider.

    The pros and cons of assuming a mortgage very much depend on the balance of the current home loan and the home’s equity. If the seller’s home equity is high, then it is more likely that the buyer will need to make a substantial down payment or take out a second mortgage. That’s because you will need to make a down payment that covers the difference between the price you’re purchasing the home for and the outstanding balance on the seller’s mortgage. 

    On the other hand, if the seller’s home equity is low, then assumable mortgages are more attractive to potential buyers. Further pros and cons take into account lender qualifications, outside fees, flexible loan terms, and market interest rates.

    Pros of an assumable mortgage

    Some of the primary benefits of assumable mortgages include:

    • Lock in a low interest rate: An assumable mortgage can be advantageous for buyers if the interest rate of the seller’s mortgage is lower than the current market rate. Assuming the mortgage during a high interest rate environment can save the buyer money on monthly payments by enabling them to lock in a lower rate than the current market would permit.
    • Low down payment if equity is low: If the seller has low home equity, an assumed mortgage is another way to save costs for buyers. Low home equity is when the overall market value of the home is not that much greater than the remaining mortgage balance. In a low home equity environment, the buyer can assume the mortgage from the seller and face a smaller down payment to cover for the purchase price of the home. 
    • Faster processing and closing times: Assumable mortgages can be easier and faster for buyers to qualify for compared to conventional mortgages. Assuming a mortgage can help streamline underwriting and loan processing, resulting in quicker closing times for buyers and sellers. 
    • Lower closing costs: Assuming mortgages involve less paperwork compared to conventional home loans that are given out by lenders, resulting in fewer steps and less fees associated with loan processing.

    Cons of an assumable mortgage

    It is important to carefully balance the advantages of assumable mortgages with some potential disadvantages. Below are some of the primary drawbacks of assumable mortgages: 

    • High down payment requirement if equity is high: A high home equity is when the value of the home is significantly higher than the unpaid balance of the mortgage. If the buyer takes on an assuming loan with high home equity, then they will likely have to make a large down payment or find a second mortgage, which can be tricky if the terms clash with the existing assumed loan.For example, let’s say the seller owes $100,000 on their $400,000 home loan. Over the years, their home has appreciated to the point where you’re purchasing it for $500,000. In this case, you would have to make a down payment of $400,000 to cover the difference between the loan balance and the purchase price. 
    • May need a second mortgage: If you enter into a situation where you have to make a substantial down payment by assuming a mortgage, you may need to take out a second mortgage to purchase the home. While assuming a mortgage and taking out a second mortgage may still be able to save you money on interest in the long run, dealing with two mortgages can be complicated and not every lender will agree to issue a mortgage under these circumstances. 
    • Assumable loan options are limited: Many traditional mortgage products are not assumable. This means that if you are hoping to assume a mortgage, you’ll need to find a seller that has an assumable mortgage, which can severely limit the scope of your home search. 

    Types of Assumable Loans

    When we talk about assumable mortgages, we’re mainly referring to three government-backed financing products: VA loans, FHA loans, and USDA loans. In general, conventional loans and other traditional types of mortgage financing cannot be assumed. 

    Below, we go into more detail about each of the three types of assumable mortgages. 

    VA loans

    VA loans are backed by the U.S. Department of Veterans Affairs and are designed to make homeowning an achievable process with favorable terms. They are offered to eligible veterans, active-duty service members, and to certain surviving spouses. Assumable VA loans are subject to approval by the lender and the VA.

    An American flag patch is surrounded by small wooden cutouts in the shape of houses.

    It’s important to note that the buyer does not need to be a member of the military to qualify. However, sellers with VA loans should take into account that if they sell to a civilian, their VA entitlement will remain with the original loan until it has been paid in full or the house has been sold. 

    If a buyer is assuming a VA loan, the regional VA office, as well as the lender, will check the buyer’s qualifications and make the approval. If the home mortgage was initiated before March 1, 1988 it is considered “freely assumable” meaning that the VA office and lenders do not need to approve the loan. 

    Whether you’re a civilian home buyer or a veteran, you’ll still need to meet basic requirements and demonstrate creditworthiness to successfully assume a VA mortgage. Consult with a Griffin Funding representative for further advice on the assumption of a VA loan. 

    FHA loans 

    An FHA Loan is a specialized low-income home loan designed for individuals and families with low to mid-range credit scores or those facing challenges in gathering a substantial down payment. The Federal Housing Administration (FHA) was established in 1934 as part of the U.S. Department of Housing and Urban Development (HUD) to improve housing standards and implement a mortgage insurance system to facilitate housing finance and homeowning for Americans.

    FHA loans are assumable, subject to certain conditions. The buyer must meet the eligible standards within the FHA loan, including income checks, creditworthiness, and financial stability approved by the seller’s lender. The property must also serve as the primary residence for the seller.

    It is important to note that some assumable FHA loans may have a “due-on-sale” clause allowing the lender to request the full repayment of the loan if the home is sold or transferred. For some qualified buyers, they can ask to enter into the assumable mortgage without this clause. There is also an assumption fee to be aware of that the lender will likely charge for processing the assumed loan. 

    USDA loans 

    The U.S. Department of Agriculture facilitates USDA loans for qualifying families and individuals in rural areas. The USDA outlines these eligible rural areas in a map for prospective home buyers to check. 

    USDA loans typically require no down payments and offer relatively low interest rates, flexible credit standards, and require no private mortgage insurance (PMI), resulting in multiple cost benefits for buyers. Note that USDA mortgages do have loan and income limits based on location. 

    USDA loans are assumable but they are similar to FHA loans in that specific criteria must be met before the loan assumption. The seller’s lender must approve the buyer based upon the USDA loan criteria, their financial situation, and creditworthiness. USDA loans are also subject to assumption fees and the due-on-sale clause. Once approved, the assumable USDA loan is transferred to the buyer and they assume the interest rate and loan terms moving forward. 

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    Determine If Home Loan Assumption Is the Right Option for You 

    With the wide range of mortgages available, the prospect of homeownership can turn into a long uphill battle if you aren’t careful. Loan assumption is a unique type of home loan that might be the right option for potential buyers if market rates are higher than the current home loan and if the seller’s home equity is low.

    Buyers can consider a mortgage assumption on government-backed loans, such as FHA loans, VA loans, and USDA loans. However, it is imperative to carefully analyze the home’s equity and market rates before deciding if loan assumption is the right option. An assumable mortgage is ideal for buyers in a high-interest rate and low home equity environment. Loan assumption can ultimately help turn homeowning dreams into reality if the right qualifications and desired circumstances are met. 

    Griffin Funding can help guide potential home buyers in the right direction to realize their homeowning dream as soon as possible. Contact Griffin Funding today to get in touch with a mortgage specialist and see if assuming a mortgage is the right decision for you. 

    Want to explore other mortgage financing options or prepare yourself to buy your next home? Download the Griffin Gold app for further information and insight on different home loans and personalized assistance that can help boost your financial wellness.

    Frequently Asked Questions: Assumable Mortgages

    Do you have to make a down payment on an assumable mortgage? 

    Your down payment requirements on an assumable mortgage depends on the original terms of the loan, the lender’s requirements, and negotiations between buyer and seller. The down payment amount on an assumable mortgage also heavily relies on the equity the seller currently has. If the seller has a lot of equity, then buyers will need a larger down payment to enter into the assumable mortgage and purchase the home.

    Your down payment amount will ultimately depend on the difference between the home’s purchase price and the outstanding balance on the current mortgage. Buyers may need to make a hefty down payment if the market value of the home has significantly increased and is much greater than the mortgage balance. Buyers will either need to pay cash for the difference or take out a second mortgage. On the other hand, if the home equity is low, then the buyers will not need to cover as much of a difference and the down payment will be smaller. 

    Is assuming a mortgage a good idea? 

    Assuming a mortgage can be a good idea based upon certain circumstances. Potential buyers should consider the pros and cons of assumable mortgages as well as their own financial stability and homeowning goals when deciding whether they want to take on an assumable mortgage.

    Other important factors to consider before assuming a mortgage include the interest rate environment, the loan terms, and individual preferences and long-term plans. Assessing the interest rate that buyers can secure compared to the current market conditions is a good step in determining whether assuming a mortgage is a good idea. Buyers must also consider the loan terms, including balances and any prepayment penalties, and their own financial situation.

    Always conduct due diligence before assuming a mortgage. Consult with a Griffin Funding representative to get a clear understanding on the specific terms and conditions of an assumable mortgage, and potential risks or benefits. Every buyer has their own unique set of circumstances, so it is essential to get all the information and facts before taking on an assumable mortgage. 

    Who qualifies for an assumable loan? 

    Qualifying for an assumable loan depends on meeting specific criteria set by the lender. In federally-backed assumable loans, buyers must typically meet many of the same requirements as laid out in the original mortgage. Buyers should consider their creditworthiness, financial situation, and property requirements for assumable mortgages.

    A lender will first check the buyer’s credit history, income, and assets before approving an assumable mortgage. Higher credit scores and financial history clear of any bankruptcy and other hardships will be more attractive to lenders. They will also check if the potential buyer has sufficient income and analyze their debt-to-income (DTI) ratio.

    Lender’s may also have their own specific requirements to determine who qualifies for an assumable loan. They might charge an assumption fee and a property appraisal to make sure that the market value of the home is sufficient to cover the assumed mortgage.

    For federally-backed loans, buyers must ensure they qualify for the specific requirements of VA, FHA, and USDA loans. The requirements rarely vary from the original conditions of the loan, although it is not necessary for the buyer to be a veteran or active-duty service member to enter into an assumable VA loan.

    Conditions of assumable mortgages differ, so it is important that buyers consult and work closely with the lender to ensure they meet all the necessary qualifications and requirements of the assumable mortgage.

    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.