Your guide to an assumable mortgage
You may have heard the term assumable mortgage before but you may not be familiar with how it works. Simply put, an assumable mortgage is one that can be taken over by a new borrower. With everything in life, there are pros and there are cons to going this route. Here’s a quick guide to everything you need to know about an assumable mortgage.
What is an assumable mortgage?
An assumable mortgage is a mortgage that can be taken over by another buyer. This means that instead of applying for a new loan when purchasing a property, the homebuyer takes on the existing mortgage of the seller. The approval process is similar to a new loan in that a lender will still need to pull credit, complete an application, and verify income and other requirements are met. They won’t, however, be applying new terms or interest rates based on their application. The lender is simply making sure the new borrower can assume the payments and stay current on the existing loan. Once the new borrower is approved, the mortgage is transferred and the new buyer is responsible for the monthly payments and debt moving forward. Loans that can’t be assumed are conventional mortgages that contain a “due on sale clause.” This requires the loan to be paid in full when the property is sold and transferred to a new owner. When a home has an assumable mortgage tied to it, it is usually advertised in the listing. Keep an eye out for these properties or tell your real estate agent if this is something you are interested in.
Pros and cons of an assumable mortgage
The best part of an assumable mortgage is that you’re basically just put on the existing mortgage. You’re grandfathered into the existing loan when you purchase the property. Another benefit is if you have bad credit or other factors that would make you a less desirable loan candidate, you assume the interest rate of the previous owner. This can really help someone struggling with a bad credit history in the past or someone who may have struggled to qualify for a loan on their own. Over the life of the loan, this can really save you a lot of money. As a seller, this can also be a benefit as you may attract more buyers that wouldn’t be able to be homeowners otherwise. A downside to an assumable mortgage is that they don’t cover the full price of the home. The previous owner has likely owned the home for some time and has paid down a good portion of the loan already. The home may have also appreciated since they originally purchased the home. This means you’ll have to cover the difference. This is similar to a down payment, however. It’s basically the remaining balance of what your mortgage is and what the home costs to purchase it. To cover this, you’ll either need cash or a second loan. It’s also important to note that you’ll still need to meet certain credit requirements when you apply.
You may be able to get approved for an assumable mortgage through FHA, VA, and even some ARM loans. Not every buyer is eligible, however. You’ll need to meet certain credit and income requirements before getting approved for a loan. These will vary by lender and the type of loan. Before assuming a mortgage you’ll want to weigh the pros and cons for you and your family. Make sure to check the terms and whether or not they are better than what you could get at a market rate. Sometimes, you may get better terms by applying for a loan yourself.