Last Updated on July 5, 2022 by Luke Feldbrugge
First off, what the heck is an assumable mortgage? Assumable mortgages are a product that allows borrowers to “assume” the seller’s mortgage. In other words, if you are looking to buy a home and the seller has a mortgage that allows for it, you can take over the remaining balance left on the loan, including the mortgage term and mortgage rate.
In this market environment, that could mean a lower interest rate than the currently available rate, and fewer closing costs. For example, an appraisal is not required in an assumable mortgage and that potentially could save you hundreds of dollars.
Although the mortgage product hasn’t been popular because of record-low interest rates, it’s likely to gain more attention as mortgage rates continue to increase.
What Mortgages Qualify to be an Assumable Mortgage?
- FHA Loans: All FHA-insured mortgages are assumable. FHA mortgages originated before December 1, 1986, generally contained no restrictions on assumability. FHA loans closed on or after December 15, 1989, need to be underwritten if assumed, just as they would if they were new loans. In other words, underwriters will need to review a potential borrower’s income and credit to determine their eligibility.
- VA Loans: Mortgages backed by the Department of Veterans Affairs are also assumable. VA Loans originated before March 1, 1988, are “freely assumable,” which means the assumption doesn’t have to be approved by anyone. Loans originated after March 1, 1988, are assumable; as long as the lender approves, the buyer is deemed creditworthy and a processing fee is paid.
- Conventional Loans: In most cases, conventional mortgages are not assumable.
What are the Drawbacks?
We’ve talked about the pros related to assumable mortgages, mainly locking in a lower interest rate during a time when rates are certain to keep climbing and lower closing costs associated with underwriting a new mortgage. But, what are some of the drawbacks?
- In some cases, the borrower’s credit will be taken into account. That means you’ll need all of your finances in order just like you would for regular loan origination to qualify for the mortgage.
- You could be looking at a huge down payment if the seller’s equity is high.
- You may be required to pay loan assumption fees or ongoing mortgage insurance payments.
- Specific Drawbacks for VA Loans: Sellers of homes with VA loans risk losing their entitlement, and that could impact their eligibility for future VA home loans. To prevent this from happening, sellers need to obtain a release of liability after closing and provide proof to the Department of Veterans Affairs to reinstate their entitlement. Otherwise, they risk losing their $0 down purchasing power when it comes time to reuse the VA loan benefit. According to Veterans United Home Loan, veterans also risk losing that portion of their entitlement entirely if the assumer later defaults on the loan.
How to Find Assumable Mortgages
- Some sellers will advertise that they are seeking someone to assume their mortgage in the classified section of the local newspaper.
- You can also do a search online for assumable mortgages. Websites such as TakeList.com give homeowners an outlet to advertise their mortgages to other individuals interested in assuming the loan.
Purchasing a home with an assumable mortgage has many pros and cons that need to be weighed.
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