Preowned cars. Used books. Secondhand clothing. All of these goods can be smart money-saving purchases. So, what about used mortgages?
The idea might sound crazy, but in fact, a buyer can take over, or “assume,” a seller’s mortgage in some cases. The process isn’t easy, but both buyers and sellers should know what an assumable mortgage is, when it’s desirable and who can benefit.
Here are the basics you should know about assumable mortgages.
What is an assumable mortgage?
An assumable mortgage allows a buyer to assume the rate, repayment period, current principal balance and other terms of the seller’s existing mortgage rather than obtain a brand-new mortgage.
The biggest potential advantage for the buyer is that the terms of the seller’s mortgage might be more attractive than the prevailing terms the buyer would be offered if he or she applied for a new mortgage. The interest rate is key, though other factors should be weighed, too.
Overall, assuming an existing mortgage can be simpler, easier and less costly for the buyer, says Lemar Wooley, a spokesman at the U.S. Department of Housing and Urban Development.
How do assumable mortgages work?
When you assume a mortgage, the current borrower signs the balance of their loan over to you, and you become responsible for the remaining payments. That means the mortgage will have the same terms the previous homeowner had, including the same interest rate and monthly payments.
If you assume the mortgage, you’ll need to pay off whatever equity the seller has, as well, either in your down payment or by using another loan.
Assuming a mortgage doesn’t just have to happen through a sale though. A family members can assume an existing mortgage from a relative who has passed away, for instance, or, if one person is awarded sole ownership of a property in divorce proceedings, that person can assume the full existing mortgage themselves.
What kinds of mortgages are assumable?
In theory, any type of home loan could have an assumable mortgage clause. However, only three types of loans typically have this feature:
- FHA loans, insured by the Federal Housing Administration
- USDA loans, which are issued by the USDA Rural Development Guaranteed Housing Loan Program
- VA loans, guaranteed by the U.S. Department of Veterans Affairs
Conventional loans typically are not assumable.
What homebuyers and sellers should know
For buyers considering assuming a mortgage, know that you must still apply for the loan and meet all of the lender’s requirements as if the loan were newly originated. Without the lender’s consent, the assumption cannot happen. That restriction limits the buyer’s choice of a lender to the seller’s loan servicer.
An appraisal typically isn’t required, which might make the deal easier to close and save the buyer the appraisal fee, which could be several hundred dollars. The buyer might choose to get an appraisal independently of the lender to mitigate the risk of overpaying for the property.
Another consideration should be the seller’s equity. A lot of equity means the buyer could have to come up with a hefty down payment.
For the seller, the primary advantage of an assumable loan is that it can make the house more desirable to buyers, especially if the loan has a low rate and the seller has little equity.
Keep in mind, the seller might still be partly responsible for the debt after the buyer assumes the loan. If the buyer doesn’t make the payments, the seller’s credit could be negatively affected.
“If the lender doesn’t release the original borrower from liability for the mortgage, and the assumptor defaults, then the original borrower suffers damage to his or her credit rating,” Wooley says.