Understanding Assumable Mortgages : Is an Assumable Mortgage Right for You? FHA/VA/USDA Assumable Loans : Saving Money on Assumable Mortgages

What is an Assumable Mortgage and How Do They Work?

ASSUMABLE MORTGAGES/HOW DO THEY WORK?
An assumable mortgage allows a new buyer to take over an existing mortgage, including its terms (interest rate, loan term, balance) and obligations, instead of getting a new loan. This typically involves a buyer who is purchasing a property from a seller, where the seller's existing mortgage is assumable. Here's how it works:

1. Assumable Loan Types:
FHA loans, VA loans, and USDA loans are Assumable - while Conventional loans / mortgages are not.

2. Seller's Loan:
Assuming a seller's loan or mortgage means you take over the existing loan terms (current fixed rate, terms, etc). The current mortgage lender (bank) transfers everything out of the seller's name and into yours. It's that simple.

3. Buyer's Eligibility:
As with any loan, a buyer must meet the mortgage lender's requirements to assume the loan, which typically involves a credit check and review of your financial situation (debt-to-income, FICO scores, employment verification, etc).

4. Application and Approval:
Buyer must apply with the current lender in order to assume the seller's existing mortgage. The lender will review your application to ensure they can meet the loan's obligations (per #3 above).

5. Transfer of Ownership:
Once you are approved, the property title will be transferred to you and you now become responsible for the mortgage payments.

6. Release of Liability:
Most sellers will ask the lender for a release of liability, so once the buyer closes on the property, seller no longer has any liability for your future payment history.

7. New Borrower:
As the new borrower, you takes on the responsibility of making payments to the original lender, according to the existing loan terms. Everything stays the same - once again, you are taking over the payments with a fixed interest rate and term.

8. Down Payment:
In most cases, you may need to have enough funds to cover the difference between the sale price negotiated with the seller and the outstanding loan balance as of the day of closing. For example, if you purchase a home for $515,000 and the seller owes $500,000, you will need to have $25,000 to purchase this home. This is often referred to as "equity buyout" and in this scenario is equivalent to ~3% down which is what it would take to get approved for any other type of mortgage anyway!

9. Closing Costs:
Besides locking in a lower-than-market fixed interest rate, the most significant savings will be realized in the buyer's closing costs associated with assuming a mortgage. Since the assumption is facilitated directly with the current mortgage lender, the cost is limited to a processing fee (~$1700-$2000) + title fees and you may be asked to reimburse the seller for their escrow funds because those are transferred to the buyer at closing as well. But you will not have to pay for upfront mortgage insurance which saves ~$9,000 or the VA funding fee! Assumption closing cost savings are incredible compared to traditional financing because a buyer usually needs an additional 2-3% ($10,000 to $15,000 cash based on the above scenario). This in and of itself makes an assumption attractive!

10. No Appraisal:
Another huge cost-saving of assuming a mortgage is the lender typically does not require a new appraisal. This saves the buyer time and ~$800.

 

BENEFITS OF ASSUMABLE MORTGAGE/IS IT WORTHWHILE?
Both buyers and sellers can benefit from an assumable mortgage.

Homebuyers gain an opportunity to take over the seller’s existing loan usually at a much lower interest rate than what is currently available in the market. This can lead to significant long-term interest savings from tens of thousands to hundreds of thousands over the life of the loan.

For Sellers, assumable mortgage help make your property more attractive to potential buyers. An assumable mortgage provides a competitive edge in a slower market or even in a competitive market when interests rate spike. This type of mortgage can be particularly appealing if the seller’s loan terms are more favorable than the current lending environment.

Always run the numbers to see what the actual cost savings and down payment figures are before pursuing a loan assumption. Assumable mortgages can be a win-win, creating a smoother transaction process for both parties.

 

ASSUMABLE MORTGAGES/MYTHS DEBUNKED
You may hear antidotal stories about assumable loans taking 6-9 months or even up to a year to get approved. This simply isn't always true. Most lenders can typically pre-approve a borrower within a week and closing can be scheduled within 30-days. Always inquire first - never assume (pun intended).  :)

You can't get the home inspected.
FALSE. As with any home purchase, you will have a fully executable purchase contract with dates, deadlines and contingencies. One of the most important contingencies in a contract is the inspection. Never waive your right to have the property inspected or you will end up regretting it!

You have to go through the seller's listing agent or you can't have your own real estate agent/broker.
FALSE. Every buyer has the right to hire their own real estate agent and due to industry changes effective August 17, 2024 involving how real estate agents are compensated in the United States, you will have to determine whether your agent has the knowledge and skills to help navigate the assumption process. I encourage every buyer to see advice and counseling of a reputable buyer's agent to look out for your best interests. However, you are always welcome to contact the seller's agent too - just remember, the listing agent works on the seller's behalf and is obligated to answer questions and even write an offer for you as a customer, but will not be able to advocate on behalf of your interests. Learn more about buyer agency.

You can use any mortgage lender to finance the seller's assumable mortgage.
FALSE. Assumable mortgages / loans must be applied for and approved with the current mortgage lender. They will be the ones who determine whether you have the credit, financial means, employment, etc to take over the seller's existing loan.  

 

ASSUMABLE MORTGAGES/8-STEPS
Step 1: Find a Home With an Assumable Mortgage
Look for properties that have a seller who is willing to transfer their existing mortgage to you. FHA and VA loans are often assumable, while conventional loans may or may not be.

Step 2: Examine the Mortgage Terms
Request a copy of the sellers most recent mortgage statement so you can fully review the existing loan terms, including the interest rate, monthly payment, escrows collected and remaining loan term (years). Compare these terms to current market rates to see if assuming the mortgage offers a financial advantage.

Step 3: Determining the Cash Required
The first thing you need to do is calculate the difference between the home's sale price and the remaining mortgage balance. This difference represents the seller's equity stake and the amount you will need to pay in cash to the seller at closing. Some refer to this difference as a down payment or equity buyout.

Step 4: Explore Financing Options
If you cannot come up with the full cash amount required to assume the loan, you may be able to secure an additional personal loan to cover a portion of the difference. Personally, I don't recommend this option because interest rates on personal loans can be very expensive and negate the reason for going down the assumption path in the first place.

Step 5: Apply for Mortgage Assumption
You will need to communicate directly with the seller's listing agent/broker and their mortgage lender to complete the mortgage assumption application. You’ll need to provide financial documentation and meet the lender’s credit and income requirements.

Step 6: Obtain Lender Approval
The current mortgage lender will review your application and assess your eligibility to assume the mortgage. Expect to provide all the standard financial information generally required from a lender for a home loan application. This can include pay stubs, bank statements, W2s and other documents to prove your ability to take over the mortgage. The process is simple and you should know within five (5) business days where you are qualified or not.

Step 7: Appraisal & Title Verification
In most cases, the current lender will not require an appraisal (saving ~$800). However, they will require a title check in order to confirm that no outstanding liens or encumbrances are on the property.

Step 8: Finalize the Purchase
Once approved, you will finalize the purchase by paying the seller the required cash and signing the necessary documents to assume the mortgage. This process is part of a normal or traditional closing home-buying timeline.

My personal belief is that everyone deserves Nordstrom-level service...it's just the way I've always conducted my business. When your friends & relatives need honest, responsive and professional real estate advice - please have them call Anthony Rael at (303) 520-3179. Rest assured, I will do everything humanly possible to ensure a stress-free transaction. Your friends & family will appreciate the referral.

Anthony Rael, RE/MAX Alliance offers professional & trustworthy real estate services to buyers & sellers throughout the Denver metro area including Arvada, Aurora, Brighton, Broomfield, Denver, Golden, Highlands Ranch, Lakewood, Littleton, Louisville, Longmont, Thornton, Westminster, Wheat Ridge, Adams County, Denver County & Jefferson County Colorado.  Find out why Denver is rated one of the Best Places to Live!  I offer homebuyers & sellers a 100% Performance Guarantee that will exceed your expectations and set a new standard of service excellence.

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