A Guide to Understanding Assumable Mortgages

The housing market can be hard to understand, but knowing about the different mortgage choices can make it easier. The assumable mortgage is one of these options. It lets a buyer take over the seller’s current mortgage, which could mean lower interest rates for the buyer.

What does a “assumable mortgage” mean?

Someone can take over the seller’s mortgage, which is also known as a “assumable mortgage.” This might be a good idea if the interest rate on the current loan is lower than the market rate. The buyer takes on all of the seller’s loan terms, such as the interest rate and the amount still owed. When interest rates are high, this can be especially appealing.

Which mortgages can be taken over?

You can’t take over all debts. Assuming a conventional debt is usually not possible unless there is a special case, like when the property is transferred because the owner died. Government-backed loans, like FHA, VA, and USDA loans, can be taken over, but only if certain conditions are met:

When applying for an FHA loan, both the buyer and the seller must have lived in the home as their main residence.
VA loans are available to eligible military members and their partners. Under certain circumstances, a non-military buyer may be able to take over the loan.
For USDA loans, you usually need permission from both the investor and the USDA.

How does a mortgage that can be taken over work?


Assumable debts need to be approved by the lender. The buyer has to meet creditworthiness and other financial requirements in order to get the loan. The fact that there is no need for an evaluation saves the buyer a lot of money. But buyers should be careful because they will be responsible for the loan’s terms, and if the buyer doesn’t pay, the seller may still be responsible.
Assumable debts need to be approved by the lender. The buyer has to meet creditworthiness and other financial requirements in order to get the loan. The fact that there is no need for an evaluation saves the buyer a lot of money. But buyers should be careful because they will be responsible for the loan’s terms, and if the buyer doesn’t pay, the seller may still be responsible.

A look at the pros and cons of assumable mortgages:

Lower interest rates could save you a lot of money over the life of the loan.
Easier to sell: Homes with debt that can be taken over may get more buyers.


Not so good:

Financial Risk: If the buyer doesn’t pay, the sellers may still be responsible.
Fewer Lender Options: Buyers can only work with the lender the seller has.
Possible Loss of VA Entitlement: If the buyer doesn’t pay back the VA loan, the seller may lose their entitlement.
How to Qualify and Costs
The buyer must meet the lender’s credit and financial standards in order to get an assumable mortgage. Assumption fees are one type of cost that can change by lender and loan type. For VA loans, unless the buyer is excused, there is usually a funding fee.

After a divorce or death, the assumption
When someone dies or gets divorced and someone else takes over the mortgage, the new borrower’s financial security must be checked. This process is like asking for a new loan: you have to show the lender that you can make the payments.

In conclusion


People who want lower interest rates and an easier buying process may find that assumable mortgages are a good choice. However, it is important to know what the risks and criteria are. Talking to a bank expert can help you make good decisions.

As always, contact your financial advisor if you have more questions to see if this is best for you.

 

Please see disclosures here.

GLEN HEDRICK, ADVISOR

The Wealth of Advice is a financial blog that is focused on retirement and wealth information, with a little of everything else sprinkled in.

I manage portfolios for clients and myself at Old North State Wealth Management.

Disclosures can be found here.

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