Assumable Mortgage: What it is and How it Works
October 19, 2022
An assumable mortgage allows a buyer to purchase a home by taking over the payments on the sellers existing loan rather than obtaining a new loan.
One of the biggest benefits to a mortgage assumption is that your rate would be far below today’s current interest rates. To assume a loan, you must apply and be qualified by the seller’s lender but the approval process is similar to applying for any other type of mortgage loan.
Which loans are assumable?
FHA and VA loans are generally assumable if the new borrower qualifies with the sellers existing lender to take over the loan payments.
Conventional Fixed Rate loans contain a due-on-sale clause and are not assumable.
Do I need a down payment?
The current borrower has likely paid down some of the original loan balance and the home has also increased in value. The difference between the sales price and the loan amount being assumed is your required down payment.
One option for bridging that gap may be to use a Home Equity Line of Credit which the borrower would apply for at the same time they are qualifying for the assumable loan. In some instances, the seller may be willing to do a seller carryback Note and Deed of Trust.
What are the Pros and Cons of an Assumable Mortgage
Pros
- Lower interest rates
- Qualifying for a higher loan amount – with a lower interest rate you can qualify for a larger loan.
- Fewer closing costs – closing costs on assumed loans are usually lower than on a new loan and usually you will not need an appraisal.
Cons
- Higher down payment
- Ongoing mortgage insurance – FHA Loans have mortgage insurance payments for the life of the loan.
VA loan eligibility – If a non-veteran assumes a VA loan the original borrowers VA eligibility will not be available to him until the loan has been paid in full.
