When it comes to buying a home, most buyers are familiar with securing a brand-new mortgage. But what about stepping into someone else’s shoes? Assumable mortgages offer a unique alternative, allowing buyers to take over the seller’s existing loan – potentially locking in a lower interest rate and saving money over time. Whether you’re looking at homes in Salt Lake City or considering properties in another competitive market, like homes in Charlotte, assumable mortgages can be a smart move in the right situation. However, they come with their own set of considerations. From evaluating the loan terms to understanding the hidden costs, assuming a mortgage isn’t a decision to take lightly. This Redfin article has everything you need to know before jumping in.
What is an assumable mortgage?
An assumable mortgage is a type of home loan that allows a buyer to take over, or “assume,” the seller’s existing mortgage, including its interest rate, terms, and remaining balance. Instead of applying for a new home loan with today’s mortgage rates and terms, the buyer steps into the seller’s position as the borrower and continues making payments under the original loan agreement.
Assumable mortgages represent a unique opportunity in the right circumstances but require careful due diligence. Both the buyer and seller must work closely with the lender to ensure compliance with the loan’s terms and approval requirements.
How do assumable loans work?
When you assume a mortgage, you take over the seller’s remaining loan balance and become responsible for the ongoing payments. The main benefit of assuming a home loan is that the buyer inherits the original loan’s interest rate, which can be particularly advantageous if the current mortgage rates are higher. For example, if the seller has a 3% interest rate and current rates are 7%, the buyer saves significantly on monthly payments by keeping the lower rate.
However, there are other costs you need to account for in addition to the loan itself, such as:
- Equity payment: You’ll need to pay the seller for the equity they’ve already built up in the home. This is typically reflected in the sale price of the property.
- For example: If the home sells for $400,000 but the mortgage balance is $300,000, the buyer must cover the $100,000 difference—either in cash or through additional financing.
- Assumption fee: Lenders typically charge an administrative fee to process the loan transfer, usually ranging from 0.05% to 1% of the remaining loan balance.
Assuming a mortgage usually takes 45 to 90 days, though it can take longer depending on the lender and loan specifics. During this time, the lender reviews the buyer’s qualifications and processes the transfer. While it may take longer to close, the benefits can make it worthwhile.
Late payments on the mortgage must be resolved before the loan can be transferred. Typically, the seller is responsible for bringing the loan current, but buyers should review the loan history to ensure there are no hidden liabilities or unresolved fees that could delay the process. Any unpaid fees or unresolved issues could delay or complicate the transfer.
What types of mortgage loans are assumable?
Not all mortgages are assumable. Government-backed loans such as FHA, VA, and USDA loans are the most common types of assumable mortgages. Conventional loans on the other hand typically include a due-on-sale clause, which prevents them from being assumable. This clause is a standard provision in most conventional mortgage agreements and requires the borrower to pay off the full loan balance if the property is sold or transferred. While it’s not as common, a lender might waive the due-on-sale clause in special circumstances, such as during a family transfer or inheritance.
FHA loans
FHA loans are popular for their flexible credit requirements and low down payment options, which make homeownership more accessible. These loans are assumable, but the buyer must meet the lender’s approval criteria, including a sufficient credit score and stable income. Additionally, the lender must verify the buyer’s ability to take over the remaining payments. The seller must also be in good standing with their loan, meaning it cannot be delinquent.
VA loans
VA loans are specifically designed for eligible veterans, active-duty service members, and certain surviving spouses. These loans can be assumed by other qualified buyers, whether they are veterans or not, provided the lender approves. VA loans typically offer significant advantages, like no down payment and competitive interest rates. If the buyer assuming the loan is not eligible for VA benefits, the original borrower may lose their VA entitlement unless the loan is fully repaid. This makes it especially important for both parties to understand the potential implications before proceeding.
USDA loans
USDA loans, which are aimed at promoting homeownership in rural and some suburban areas, are also assumable under certain conditions. These loans offer attractive terms like no down payment and low interest rates, but the property must meet USDA eligibility requirements based on location, and the buyer must meet the lender’s income limits. Like with FHA and VA loans, the buyer must go through an approval process to ensure they can meet the loan obligations.
The pros and cons of an assumable mortgage
While assumable mortgages offer clear advantages, it’s essential for buyers to weigh these benefits against potential challenges, such as upfront equity payments and lender approval requirements.
The pros of assuming a mortgage
- Lower interest rate: The most significant advantage for buyers is the ability to take over the seller’s interest rate, which may be lower than current market rates. In a rising rate environment, this can lead to substantial long-term savings.
- Fewer closing costs: Assuming a loan typically involves lower closing costs compared to obtaining a new mortgage. For example, buyers often pay an assumption fee (usually a small percentage of the loan amount) instead of standard closing costs, which can include origination fees, appraisal fees, and more.
- Simplified financing process: Assuming a loan often involves fewer steps than securing a new one, such as skipping an appraisal or less stringent requirements.
The cons of assuming a mortgage
- High upfront costs: Buyers are responsible for covering the equity the seller has built in the home, which is usually reflected in the sale price. This can require a significant upfront payment, especially if the home’s value has increased substantially since the original loan was issued.
- Limited loan and lender options: Assumable mortgages are typically limited to FHA, VA, and USDA loans. Buyers seeking conventional loan terms may not have this option. Buyers also will not have the freedom to choose which lender they’d like to work with.
- Mortgage insurance: If the original loan required private mortgage insurance (PMI), which is common with FHA loans, the buyer must continue paying for it until the loan balance reaches the threshold where PMI is no longer required.
3 important things to do and consider before assuming a mortgage
Deciding whether an assumable mortgage is right for you will depend on your situation, if it’s a good time to buy a house in your market, and the specifics of the home loan. While these loans can offer benefits like lower interest rates or simplified financing, there are several important factors to weigh before making your decision.
1. Understand the total cost and evaluate your financial situation
When assuming a mortgage, the total cost goes beyond the price of the home and the remaining loan balance. There are several other expenses that come with homeownership that you need to account for to ensure you’re financially prepared.
The seller’s equity: This is the difference between the home’s sale price and the remaining balance on the existing mortgage. If the equity is substantial, you may need to secure a second loan or have enough savings to cover the gap.
Additional loans: If you need to secure additional financing to cover the seller’s equity, think carefully about the implications. Will managing two loans strain your budget? Are you comfortable with the higher upfront cost? Be realistic about how this will affect your financial health and goals.
Property taxes: Ensure there are no outstanding property taxes. If the seller has unpaid taxes, you might inherit that debt, adding to the overall cost of the home.
HOA fees: If the home is part of an HOA, you’ll be responsible for monthly or annual fees, which can range from modest to substantial amounts depending on the property.
Home insurance & flood insurance: Depending on the location, you may need additional insurance, such as flood insurance, which can add to your monthly expenses.
Inspection & repair costs: Before assuming the loan, have a home inspection done to assess the property’s condition. You’ll want to know if there are any major repairs or updates needed.
Solar panels: If the home has solar panels, confirm whether they’re fully paid off. If there’s an outstanding loan for the solar system, you may be responsible for it as part of the home purchase.
Closing costs: There will likely be closing costs associated with assuming the mortgage, such as the assumption fee (usually 0.5% to 1% of the original loan), title fees, and recording fees. These costs may be lower than a traditional loan but should still be factored into your budget.
Prepaid expenses: Depending on when the loan is assumed, you may need to cover prepaid expenses like property taxes or homeowner’s insurance for the upcoming year, or interest payments due at closing. These costs can add up, so confirm with the lender what you’ll need to pay.
2. Examine the loan terms and conditions
Carefully review the terms of the loan you’re assuming. Are there restrictions, like a remaining term that doesn’t fit your long-term plans, or an adjustable interest rate that could rise in the future? Make sure you fully understand the repayment schedule, interest rate, and any other loan-specific conditions. You’ll also want to confirm with the lender that the current mortgage is in good standing. If the seller has any missed payments or delinquencies, you’ll need to address these before assuming the loan. Unresolved issues could delay or even prevent the assumption process.
3. Don’t skip over essential steps of the homebuying process
When buying a home, particularly if you’re assuming a mortgage, it’s crucial to conduct thorough due diligence to avoid costly surprises. Start with a home inspection to ensure the property is in good condition and free of hidden issues like foundation problems, plumbing leaks, or electrical concerns. Even if the home appears well-maintained, a professional inspection can uncover costly repairs you may not see at first glance.
Next, ensure there are no outstanding liens or claims on the property. This includes unpaid taxes, contractor bills, or other legal claims that could affect your ownership. These issues can be discovered during a title search, which is another essential step. A title search will verify the property’s legal ownership and ensure there are no unresolved disputes or third-party claims.
By thoroughly inspecting the property, checking for liens, and conducting a title search, you ensure that your investment is secure and that you’re aware of any potential legal or financial issues before moving forward with assuming the loan and taking over ownership of the property.
How to find assumable mortgage listings
While homes for sale with an assumable mortgage aren’t as common, there are still several ways you can go about finding one. Start by using keywords like “assumable” or “assume” in the filters section when searching for homes online on Redfin. This can help you quickly locate properties where the seller has highlighted the assumable loan as part of the sale.
A real estate agent familiar with assumable mortgages can also be a valuable resource. They can identify properties with assumable loans, contact sellers, and negotiate on your behalf. Agents may also have access to local MLS data that includes filters for assumable loans, which aren’t always visible to the public.
You can also reach out directly to lenders who frequently issue assumable loans, such as those backed by the FHA, VA, or USDA. They may be able to provide information on current sellers whose loans are eligible for assumption. By combining these approaches, you can increase your chances of finding a home with an assumable mortgage that fits your needs.
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