Explaining the basics of assume a mortgage in the real estate industry.
What is an assumable mortgage and how can it be used to purchase a home? Simply put, an assumable mortgage is when a buyer takes over an existing mortgage from the current homeowner. This can be beneficial if the loan terms are favorable or if the buyer qualifies for a traditional mortgage.
However, not all loans are assumable. Conventional mortgages are generally not assumable, but loans insured by the Federal Housing Administration (FHA) or the United States Department of Agriculture (USDA) can usually be assumed if certain requirements are met. Also, seller and lender approval is usually necessary for assuming FHA and Department of Veterans Affairs (VA) loans. Before considering this strategy, it is important to consult with the seller and their lender to confirm that the loan can be assumed.
Essentially, an assumable mortgage works similarly to a traditional home loan, but the buyer is limited to financing through the seller’s lender. Without approval, the seller may have to pay the full remaining loan balance upfront if the buyer defaults on payments.
One advantage of assumable mortgages is that an appraisal is not typically required, but it is still advisable for buyers to order a home inspection to check for any needed repairs. Once the buyer closes on the home, the seller is no longer responsible for mortgage payments.
“Assuming a mortgage can be beneficial if the loan terms are favorable.”
Homes with assumable mortgages have a marketing advantage and can attract multiple offers. Also, lower interest rates and skipping appraisals can save buyers thousands of dollars over the life of the loan.
On the other hand, there are some cons to loan assumptions. The first one is the increased financial risk sellers face when buyers with VA home loans take over the mortgage. If a buyer takes over a suitable mortgage and transfers the ownership to an undisclosed third party, the seller may still be responsible for covering any mortgage payments that the new owner misses. Also, if the sellers are unaware of the transaction, there is an increased risk of default.
The second downside is the potential loss of entitlement. Sellers with assumed VA loans may lose their entitlement if the new owner defaults, which can affect their ability to obtain future VA home loans. To prevent this, sellers need to obtain a release of liability after closing and provide proof to the VA to reinstate their entitlement.
Lastly, assuming a loan limits the buyer’s opportunity to shop around. Buyers are restricted to the original terms and conditions of the seller’s lender, which can restrict their ability to find more competitive rates.
If you are interested in buying a home through a loan assumption, it is important to consult with the seller, their lender, and a qualified mortgage expert to understand the specific documents required to qualify. If you have any questions or need a referral to a good local lender, please call or email us. We’re always happy to help!
