Key Takeaways
- Assuming a loan on a house can be a great move if the existing loan offers better terms and conditions than are available in the current marketplace.
- Assumable homes for sale could potentially represent a win-win for both buyers and sellers.
- Assumable mortgage loans need to be approved by the loan originator before they can be carried out.
The more unique strategies buyers and sellers may implement to facilitate a deal, the more likely a sale will transpire. That said, there is one strategy today’s buyers and sellers need to add to their arsenal if they want to give themselves the best chances of closing a deal: the assumable mortgage. While lesser known than traditional mortgages, assumable mortgage loans represent a very viable opportunity for buyers and sellers to strike a deal. Perhaps even more importantly, the deal may represent a better opportunity for each party involved in the presence of favorable market conditions.
What Is An Assumable Mortgage Loan In Real Estate?
An assumable mortgage is an arrangement between the current owner and an impending buyer that transfers the existing mortgage and its terms from the home’s owner to the new buyer. In its simplest form, however, this arrangement will witness a buyer assume the mortgage of the owner, and any remaining debt obligations promised to the lender. In doing so, the seller is able to remove themselves from their current mortgage and sell the property. The buyer, on the other hand, can circumnavigate having to apply for their own loan; they simply take on the one that is already in place. That means the person assuming the mortgage will inherit the same terms: current principal balance, interest rate, repayment period, and any other contractual terms of the mortgage.
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How Do Assumable Mortgages Work?
While each party may approve of the idea of an assumable mortgage, the final decision is ultimately left up to the lender. In order for an assumable mortgage to be transferred, the original lender must give their approval. As a result, the buyer will be expected to apply for an assumable loan and meet the requirements set forth by the lender, as to prove themselves creditworthy. In the event the buyer receives approval, they will take over the title, and any monthly payments stil owed to the lender.
Assumable mortgages are just one of many ways titles may transfer hands over the course of a sale, which begs the question: Why not carry out a traditional sale? In order to answer that question, let’s take a look at the benefits and downsides associated with the process.
The Benefits Of Assumable Financing
The following benefits represent the most common reasons buyers and sellers may want to follow through with the assumable mortgage real estate process:
- Cost & Time Savings: Since an assumable mortgage will simply transfer an existing mortgage from a seller to a buyer, the process is a lot less time consuming and rigorous than applying for a traditional loan––all of the underwritings are already in place. As a result, assumed mortgages are also a lot more cost-effective than their traditional counterparts, as many of the fees are rendered moot without having to jump through all the regular hoops associated with mortgage underwriting.
- Current Rate Environment: Depending on the current rate environment and the rate associated with the assumable mortgage, buyers may be able to assume a loan with a lower interest rate than if they based their purchase off of current rates. In other words, if the current loan has a lower rate than today’s rates, they can lock in their purchase at a lower rate.
- The Amount Of The Existing Mortgage: If the seller has a considerable amount of equity built up in the property, and they don’t owe a lot on the remaining balance, the buyer may not have to take out an additional loan to cover the acquisition. In other words, if the buyer can cover the difference in cash, they can pay the seller directly without having to take out another loan.
- Shorter Loan Duration: In the event the original loan holder paid down a considerable amount of their mortgage, there is a good chance there are fewer years left on the assumable mortgage. That means the buyer is only responsible for paying the remaining years left on the loan, which should be less than most traditional loan terms.
- Buyer’s Market Incentives As the seller, offering an assumable mortgage option could make the property more attractive and help sell the home faster. There is no reason a seller with an attractive mortgage couldn’t use the assumable approach to sweeten the deal for potential buyers; that way, everyone wins.
The Downside Of Assumable Financing
Now let’s take a look at some of the downsides associated with assumable financing:
- Current Rate Environment: A pro and a con, the current rate can work against you or in your favor. If the assumed interest rate is higher than the current rate environment, this mortgage option may not be the smartest move.
- The Amount Of The Existing Mortgage: In the event the current owner does not have a lot of equity in the property, and they still owe a large percentage of the loan, the buyer applying for an assumable mortgage may need to place a considerably large amount down at signing. For example, if the buyer is purchasing a home for $200,000, and the current mortgage has an outstanding balance of $100,000, the buyer will need to cover the $100,000 difference. If they can’t come up with the money on their own, they may need to take out a separate mortgage, which won’t retain the same underwriting as the assumed mortgage.
- Not All Mortgages Are Assumable: While not necessarily a risk, it’s still worth pointing out that not every loan is assumable. Conventional loans are not assumable, and there are only three types of loans that are: FHA loans, USDA loans, and VA loans.
- Significant Appreciation: In the event the home has appreciated considerably, assuming the loan will fail to cover the costs. In other words if the home is worth $100,000 more than the loan covered, the buyer will need to cover the difference. Again, the buyer can take out a second mortgage to cover the difference, but second mortgages are often more difficult to qualify for.
- VA Loan Benefits Don’t Transfer: The VA benefits are attached to the respective loan, and not the homeowner looking to sell; they are two separate entities. As a result, it may be difficult for the veteran to utilize their benefits after they move.
Summary
Assumable mortgages aren’t as popular or well known as their traditional counterparts, but they are nonetheless a viable strategy for anyone looking for a means to an end. At the very least, these little-known strategies award both buyers and sellers one additional way to complete a transaction. Perhaps even more importantly, assuming a mortgage loan can create a win-win scenario for each party involved, provided the market conditions are right.
Have you ever purchased a property by assuming a mortgage? If so, please feel free to share your thoughts on the process in the comments below.
