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What is an assumable mortgage?
An assumable mortgage is a home loan that a buyer can take over from a seller, generally with lender approval. The buyer agrees to make all future payments at the original interest rate, and the agreement normally severs any legal ties the seller has to the home.
- When interest rates rise. In 2016, when interest rates hovered at record lows, it did not make sense to assume a mortgage loan. However, the practice becomes more attractive as rates rise, provided you can assume a loan at a lower interest rate than you would be able to secure through a mortgage lender.
- When your credit is less than perfect. Taking over a government loan, like those through the Federal Housing Administration (FHA) or Veterans Administration (VA), is easier for those with less-than-stellar credit. A homebuyer with a FICO score of 640 likely would not qualify for a conventional loan, but would likely qualify for an FHA loan.
- When your debt-to-income ratio is higher. FHA and VA loans allow for a higher debt-to-income ratio, meaning you can have more debt compared with your income and still qualify for one of their mortgage loans.
- You want to have the property paid off faster. A traditional mortgage term is usually 30 years. However, if you assume the loan of a seller who has already been in the house for seven years, you will have only 23 years left on your mortgage.
- You want to save on closing costs. Lenders do normally charge a fee when you assume an existing mortgage, but it is typically less than standard closing costs would be.
Assumable mortgage example
Not all types of mortgages are assumable, and due to stricter lending regulations, assumable mortgages are less common now than they were when the housing bubble burst in 2007-2008. If you are shopping specifically for an assumable loan, keep in mind the following:
- Most VA loans are assumable.
- Most FHA loans are assumable.
- Some conventional loans are assumable.
If you are interested in assuming a mortgage, let your Realtor know. He or she should be able to find what is available in your area.
The assumption process of an FHA loan is determined by when the original loan was taken out. Any loan originated prior to Dec. 1, 1986, can be assumed under a “simple assumption” process, which requires no credit check or lender approval. Any FHA loan taken out after that date is subject to the “creditworthiness assumption” process, meaning that you would need to qualify as though it were a new loan.
VA loans require you to have the credit and income to qualify for a mortgage, even when you assume an existing note. They also require that a fee equal to 0.5 percent of the existing principal balance be paid by you or the seller. Both the VA and lender must OK the assumption of any VA loan originated after March 1, 1988.
The downside of assuming a mortgage may be the amount of cash you are required to come up with. If a seller is asking $300,000 for his home, but only owes $200,000 on the mortgage, you would be expected to come up with the $100,000 difference. The trick, if you do not have a great deal of money to put down, is to find an assumption in which the seller has little equity in the home.
Use our calculator to figure out how much house you can afford to buy.