An assumable mortgage is a home loan that allows you to take over a seller’s home loan instead of applying for your own mortgage. However, not all mortgages are assumable — typically only some FHA and VA loans are assumable.
An assumable mortgage is best done with lender approval and usually has little to no change in terms. This goes for the interest rate too!
There are benefits for both you and the seller when deciding to go the route of assuming the mortgage rather than getting a new one. The plus side for you is that by taking over the home loan, you also take over the mortgage interest rate which may be lower --sometimes much lower --than current market rates.
The rate may also be lower than what you could qualify for based on your credit history.
Note that closing costs may still be attached to the assumed loan, but even then, you and the seller will still come out on top. The closing costs are generally less than with other loans, and this can mean big savings for you!
The seller will also benefit from this deal. With a combination of a stellar interest rate and lowered closing costs for you, the seller has a better shot at getting a fair market price for their home.
In fact, the advantages of assumable mortgages are so attractive that some sellers will use this as a marketing strategy!
If you've found your dream home and decide to assume the mortgage, know that you may still have to take out a second mortgage. When the value of the home is greater than the current loan amount that remains on the mortgage, you will need to pay the difference. If you don't have enough cash on hand, then a second mortgage will do the trick.
This is the point where things may get complicated for you, as both of the lenders may not agree on how to handle certain situations, like in the unfortunate case that you default on either loan.
Call our office to learn more about how mortgages from two different lenders work.
Issues could arise if the paperwork is not processed correctly --such as the seller not being removed from the original loan.
This is a problem because if you default on your mortgage, the seller will likely still be legally responsible for the amount owed. Sellers can avoid this by making sure that they obtain a release of liability that removes them from the loan and clears them of responsibility.
There are also unauthorized assumable mortgages that are done without a lender. In this case, a seller has you move in and make their mortgage payments. In other situations, they ask you to pay monthly, as you would do paying rent. However, the seller remains owner and mortgage holder.
These circumstances can get very tricky, especially if it is done between family or friends and in good faith. We encourage you to consult with an experienced mortgage professional before agreeing to assume a mortgage, whether authorized or not.
Assuming a mortgage has its pluses and minuses, and they can vary depending on the loan terms and your financial situation. Let us help clear things up for you!