Assumable Mortgages and Assumable Loans

An Assumable Mortgage is a loan that allows a buyer to assume (or take on) the current owner’s mortgage loan, including the interest rate, repayment term, current principal balance, and other terms of the existing mortgage on the property. Essentially, the mortgage transfers from the current seller of the home to the buyer. In an environment of increasing or higher interest rates, leveraging an assumable mortgage is a great way for a buyer to purchase a home at a lower interest rate.

As a seller, be sure to know if your mortgage is an Assumable Loan. If it is, this a significant advantage in a higher-rate market, as it increases your buyer pool. It’s definitely something you should market in your home’s listing.

No. The majority of “conventional loans” are not assumable. However, there are a great deal of existing loans that are assumable. Mortgage loans that are insured by FHA (Federal Housing Administration), backed by the VA (Veterans Affairs), or backed by the USDA (United States Department of Agriculture) are assumable under conditions that specific requirements are satisfied.

When both the buyer and seller of a property meeting FHA’s requirements for an assumption, an FHA loan is assumable. One condition is that the property is the seller’s primary residence. If the property passes this requirement, the buyer must apply as they would for any FHA loan (assumable or not). From there, the seller’s mortgage company will verify that the buyer meets the criteria, including credit scoring and debt-to-income ratios. If approved, the buyer can assume the loan. One important item to note: unless the seller is specifically released from the mortgage loan, they are still responsible for it.

While the VA only offers mortgages to qualified military members and spouses, the buyer doesn’t need to be a member of the military to qualify to assume a VA loan. The mortgage lender and the regional VA office will still need to approve the buyer in order for the loan assumption to take place. An interesting fact: for VA loans initiated prior to March 1, 1988, buyers may freely assume the loan, and the buyer of the property doesn’t need the approval of the VA or the mortgage company to assume the loan.

USDA loans are offered to buyers in certain rural areas. They often have low interest rates and no down payment requirements. In order to assume a USDA loan, the buyer of the property must meet the standard qualifications like creditworthiness and income, along with the approval from the USDA to transfer title (or ownership). One important item to note: the buyer is not able to assume a USDA loan if the seller is delinquent on payments, even if the buyer is fully vetted and qualified.

Pros:

• In a higher interest rate environment, a buyer may be able to obtain a rate below market rates.
• If there isn’t a substantial amount of equity in the home or if the buyer has cash reserves, the buyer may not need to secure new lines of credit for the purchase.
• Out-of-pocket loan costs for the buyer are often low when equity is also low.

Cons:

• When equity in the home is high, the buyer may need a substantial down payment when the equity is high.
• Lenders may not opt to cooperate with one another if a second mortgage is needed to purchase the property.
• A seller is still responsible for the debt if the mortgage is assumed by a buyer unless the lender specifically approves a “release request” that releases the owner from the loan.

An Assumable Loan is a fantastic way to capture a below-market interest rate on a home purchase, and depending on the amount of equity in the home, the buyer may not need a large down payment or second mortgage to purchase the home. Additionally, closing costs on an Assumable Loan are often markedly lower than costs associated with traditional mortgages or conventional loans.

Believe it or not, if the seller has a large amount of home equity (balance of the mortgage as it relates to the current value of the property), this can be an obstacle (and a disadvantage) for a buyer, since the buyer will need to make up the difference between the value of the home and the balance of the loan. They can do this by bringing cash to closing or by taking out a second mortgage to purchase the property.

In most cases, a buyer will opt to take out a second mortgage, and depending on the buyer’s credit worthiness and current interest rates, the rate on the second mortgage may be considerably higher than the Assumable Loan. Additionally, the second loan may be with a different lender than the existing loan, which could create challenges if both lenders do not work together.

The average time required to complete a Loan Assumption is 45-90 days, so be sure the begin the process as soon as possible. Organize your income and employment documents so they’re ready to submit to your loan officer quickly.

If you have an FHA, VA, or USDA loan, these mortgages are assumable. Other loans, such as conventional loans, are not assumable. Keep in mind that if you currently have an Assumable Loan, this is a big advantage, and it could make your property more marketable to buyers in a higher interest rate environment.