Traditional wisdom offers plenty of warnings about the danger of assuming, and there’s certainly a risk involved in taking something for granted or accepting that it is true without question. However, the word “assume” has another meaning – and that’s the relevant meaning when you’re discussing home loans. As Merriam-Webster notes, “assume” can also mean to take on a responsibility or to take over someone else’s debt. What is an assumable mortgage? Could opting for one be a smart choice for you?
What Is an Assumable Mortgage?
As Investopedia explains, an assumable mortgage is one that allows the outstanding mortgage and its existing terms to be transferred from the current homeowner to the new homebuyer. Instead of getting a new loan, the buyer simply steps in and takes over the existing one. This allows the buyer to continue with the current interest rate, payment, and loan term. It is an interesting feature that is only available with certain loans. According to ValuePenguin, VA loans, FHA loans, and USDA loans can be assumed by qualified buyers if the relevant government entity approves the transfer. Conventional loans, however, are generally not assumable.
Assumable Mortgage Pros
An assumable loan can offer advantages that both sellers and buyers will appreciate.
For sellers, it can be a selling point that helps their property stand out in a crowded market and strengthens their negotiating position. As NerdWallet indicates, this is especially true if the current interest rates for home loans are significantly higher than the interest rate associated with their loan. The promise of a lower interest rate may allow the seller to secure a premium price for their property.
What about buyers? For starters, they’ll enjoy the perks of the low interest rate that makes the idea of assuming a loan attractive. After all, a lower interest rate generally means a lower monthly payment and a lower total cost for borrowing. As an added bonus, buyers will also likely save on closing costs. Assuming a loan normally carries lower closing costs than starting a new one.
Assumable Mortgage Cons
What are the potential drawbacks associated with assumable mortgages?
As Zillow reports, sellers may run into trouble if they fail to obtain a release from liability from the mortgage holder. Without this crucial piece of paperwork, they may be on the hook for any loan payments the new buyer misses.
For buyers, the need to achieve balance may be an issue. After all, if the value of the home is significantly higher than the balance remaining on the loan, the buyer will need to make up the difference with either a hefty down payment or a second mortgage.
How to Assume a Mortgage
So, you’ve decided that an assumable mortgage is the right choice for you, and you’re ready to move forward. How do you assume an assumable mortgage? While the exact process will depend on the type of loan, ValuePenguin offers a general guide:
- Verify that the loan is assumable. Check the loan documents for an assumption clause, refer to page four of the Closing Disclosure, or contact the lender.
- Send assumption request letters. Send assumption request letters to both the lender and the relevant government agency. Be sure to ask about the fees involved in assuming the loan.
- Submit financial information for approval. Before allowing a buyer to assume a loan, the lender must verify that the buyer has the ability to make the required payments. Documentation requirements will vary, but it’s best to be prepared to submit income, credit, and asset information.
- Sign the paperwork. To seal the deal, all parties will need to sign an assumption agreement and modify the deed of trust to add the buyer’s name to the mortgage.
When you have questions about home loan products, the mortgage approval process, or other aspects of financing a home, turn to the team at PrimeLending Twin Cities. We offer user-friendly insights, expert advice, and excellent service. With a wide range of loan products to choose from, we’re ready to help you find the right mortgage for your needs. Contact us today to get started.