What is an assumable mortgage?

With an assumable mortgage, it’s like stepping into the seller’s shoes by taking over their existing mortgage. The terms of the loan, including the repayment schedule, interest rates, and remaining balance, stay unchanged for the buyer. However, the buyer will need to cover the difference between the mortgage balance and the home value, along with the remaining balance.

In simple terms, only the name on the mortgage document switches, while everything else remains the same. Assumable mortgages can be particularly appealing when current interest rates are high. Buyers stand to save a considerable amount because they’re essentially inheriting a loan with older, often lower, interest rates.

It’s important to note that assumable mortgages are applicable only to government-backed loans like Federal Housing Administration (FHA) loans, Department of Veteran Affairs (VA) loans, and United States Department of Agriculture (USDA) loans. Conventional loans cannot be assumed.

How it works

The lender’s approval is necessary for the buyer to assume the mortgage. The new borrower must provide the lender with their credit details, employment history, and other financial information before releasing the loan. 

It is risky to enter into an informal agreement with the seller without the lender’s knowledge. If the lender finds out, they can demand an immediate full payout, and/or since the seller’s name is still on the mortgage document, they are still the ones held legally responsible for paying off the mortgage even though the buyer assumed the mortgage. 

If the mortgage balance is $100,000 and the home is worth $300,000, the seller and buyer agree on when and how to pay the remaining $200,000. 

Advantages 

Easy to sell: The seller will find buyers more easily, especially if interest rates have shot up in the last few years. 

Higher selling price: The seller can negotiate a higher selling price because the buyer will be paying a lower interest rate and saving money overall. 

Lower interest rates: Buyers save a significant amount if the home’s interest rate is low, especially given the higher interest rates of the last few years.

Closing costs: The closing costs on an assumable mortgage are lower because it costs less to assume a loan than to open a new one. 

Disadvantages

Down payment: While buyers can enjoy savings on interest rates, it’s important to note that they’ll be required to make a substantially higher down payment compared to a conventional loan. This is because they have to pay the difference between the mortgage balance and the current home value. 

Stipulations: Prospective buyers eyeing FHA loans need to check the boxes on criteria such as income and credit. Additionally, the existing homeowner must have resided in the house for a specific duration before the property qualifies for an assumable mortgage.

Keep in mind that FHA loans come with monthly mortgage insurance payments, possibly extending until the loan term concludes. These payments might offset any advantages that come with assuming the mortgage.

Veterans Affairs (VA) entitlement:In VA loans, the government steps in to cover a portion of the balance if the borrower faces default. However, there’s a cap on the borrower’s entitlement based on the loan amount. Even when the mortgage is assumed, a chunk of the borrower’s entitlement remains linked to the home. This means that if the seller wants to apply for another VA loan, they might hit a snag unless they sell to another veteran or military member. In this scenario, the buyer steps in, using their entitlement, and voila, the seller’s entitlement is back in action.