When buying a house, there are many factors to consider – location, school district, commute, size…and of course, price. In today’s market, home buyers have several loan products available to finance their purchases. With interest rates on the rise, home buyers are exploring options outside of a traditional 30-year fixed loan. One such mortgage is an “assumable” mortgage”, but what exactly is an assumable mortgage?
An assumable mortgage may be an attractive approach for a home buyer to get that dream home. With an assumable loan, the buyer takes on the already-existing loan the home seller has against the home, at its current balance, and with the original terms set forth by the seller’s lender. This can be especially helpful if the seller has a low-interest rate. For the buyer looking to purchase a home without significant funds upfront, an assumable loan may be a smart option. This approach may allow the home buyer to avoid the lengthy, and sometimes difficult, process of securing a new loan.
Not all loans are assumable — typically, only government-backed loans are assumable. This includes FHA loans, VA loans, and USDA loans. A conventional mortgage is a home loan not guaranteed or insured by the federal government. Conventional mortgages are often issued by private lenders, such as banks and credit unions. Because conventional loans are not backed by the government, they are not subject to the same regulations. One key difference is that nearly all mortgage agreements for conventional loans contain a “due on sale” provision. This means that the full mortgage balance falls due when the home is sold, preventing the buyer from assuming the seller’s loan.
A FHA loan is a home loan backed by the U.S. Federal Housing Administration. This type of loan is popular with the first-time home buyer because it has less restrictive credit requirements and allows for a lower down payment. To assume a FHA loan, the buyer must first be approved by the lender. Assuming a FHA loan can be a smart option to purchase a home with less cash up front.
When assuming a VA Loan, the new home buyer agrees to take over the existing loan and make the remaining payments. The new home buyer must meet all the eligibility requirements for a VA Loan and must also be approved by the lender. It’s advised a home buyer speak with a lender if considering this approach.
A USDA loan assumption is a smart option for family members to take over responsibility for mortgage debt. The original rate and terms of the mortgage are preserved, avoiding the need for a credit check or appraisal of the property. This can make a quick and easy process for everyone involved. A USDA loan assumption may adjust the debt by re-amortizing it with new rates and terms. This can help to lower the monthly payments or lengthen the repayment period.
In a tight housing market or when interest rates are on the rise, an assumable loan may be the smart approach because a home buyer may inherit the seller’s interest rate, closing costs are often capped at a lower amount, and a home buyer may be able to skip the lender-required appraisal. As a result, assuming a loan can save a home buyer money both up front and over the life of the loan. With less debt overall, a home buyer may qualify for a smaller mortgage and take advantage of lower monthly payments.
When considering taking over a seller’s loan, it’s important to be aware of the potential drawbacks. The home buyer may be required to make a higher down payment if the seller has a lot of equity in the home. Additionally, it’s likely the lender may have credit and income requirements for the new home buyer. Finally, there are fees associated with loan assumption, such as paying off the existing mortgage insurance or taking on ongoing payments. Be sure to weigh all these factors before deciding and consult with your lender.
Assumable loans can be a smart approach to finance a home purchase. Talk to your lender for more information about whether assuming a loan is a right choice.
Leave a comment with your biggest question – or call me, Siobhan Blake, directly at 614-371-2727 to get some expert advice!