Assumable Loans

Assumable Loans

An assumable mortgage allows a buyer to assume a loan directly from a seller. While this can be complicated and it is not always possible, assumable loans can be a big selling point for sellers, and potentially help buyers save thousands.

When a buyer takes over an assumable mortgage, they receive the same repayment period, balance, interest rate, and all other terms of the loan rather than getting a new loan. For example, if the seller originally had a 30-year mortgage for $250,000 with a 3% interest rate, and has since paid down the loan to $185,000 with 20 years remaining, the buyer will take over a 20-year loan of $185,000 at 3%, regardless of current mortgage rates.

While any home loan can be assumed by a borrower, in theory, there are really only two loans that allow for this: FHA loans and VA loans. You cannot assume the majority of conventional mortgages.

Assuming a loan can offer many advantages to home buyers, as it may have a much lower interest rate with reduced costs and a lower payment.

Assumable Loans

Qualifications to Assume a Loan?

To assume a mortgage, you must meet the same qualifications as if you were getting your own home loan. The lender will check your income, credit, assets and employment to ensure you have the willingness and ability to repay the mortgage.

Assumable Mortgage With No Down Payment

With a new mortgage, you put down a down payment of 3.5% to 20% or more. Assuming a mortgage is different, however, as you do not make a down payment to the lender, but instead pay the seller for the equity in the home. This will be the difference between the home's value and the balance on the loan. This is important to consider, as it may not make financial sense for you if the seller has a great deal of equity.

Assumable Mortgage

Mortgage May Not Cover Home Price

Another consideration is the fact that the loan you assume may not be sufficient to cover the cost of the home. In this case, you may be required to pay more in cash to the seller or obtain financing in some other way.

Seller Release of Liability

Sellers can benefit from a buyer taking over the mortgage, as it can make the home more attractive to potential buyers if the loan has a lower rate than current mortgage rates, or if the seller has little equity. Unfortunately, assumable mortgages have a catch: the seller may be responsible for the debt after the buyer takes over the loan if the lender does not release the seller. Always make sure you understand if you will still be liable for your mortgage if you allow a buyer to assume it.

Assuming Existing Loan

Assumable VA Loans

VA loans are always assumable. This is an intentional benefit because military members often need to move and make arrangements for their home. There is a catch here though, because VA loans are attached to a veteran's entitlement. The seller's VA entitlement can stay attached to the loan unless the buyer is also a veteran with their own entitlement. If the seller's entitlement remains on the loan, he or she cannot get a new VA loan. Even worse, if the new borrower defaults in this case, the seller could have trouble ever using a VA entitlement again.

Should You Assume a Mortgage?

If you are planning to assume a loan to buy a home, make sure you give it plenty of thought. Buyers stand to gain the most when the seller's mortgage has better terms than are currently available such as a dramatically lower interest rate. Assumable loans also tend to work best if the seller has less than 20% equity.

Loan Repayment period

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