There are many ways for home buyers to purchase their new homes and for sellers to sell theirs. Among various types of mortgages that offer specific benefits, an assumable mortgage may be a worthwhile option for some buyers and sellers because they often come with lower interest rates and can be sold quickly.
However, they also come with some disadvantages. Keep on reading to discover more about this alternative, how it works, and whether it’s something that may benefit you.
An assumable mortgage enables a buyer to assume the seller’s mortgage. Once the assumption is complete, the buyer takes over the payments every month, and you are released from further liability. If someone assumes your mortgage, they are effectively taking over the mortgage from you.
Assumable mortgages are common when the terms available to a buyer aren’t as favorable as those previously given to the seller. Assumable mortgages also factor into divorce scenarios, for example, when the spouse who gets the home is on the title but not initially on the loan.
An assumable mortgage works similarly to a traditional one. However, the buyer is limited to financing through the seller’s lender, and lenders need to approve an assumable mortgage. If you’re the seller, you risk having to pay the remaining balance upfront if entered informally. You also risk buyers missing payments, negatively affecting your credit score.
An appraisal isn’t required in these instances, and this can save buyers hundreds of dollars. However, buyers should still order a home inspection to see whether there are any repair issues with the house. Once the buyer closes on the property, you will no longer be liable for the mortgage payments.
Loans backed by the Department of Veterans Affairs or United States Department of Agriculture or insured by the Federal Housing Administration are assumable if specific requirements are fulfilled. When it comes to VA and FHA loans, you, as a seller, must get lender approval for an assumable mortgage. Note that conventional mortgages typically aren’t assumable, except in some cases.
FHA loans require that both seller and buyer meet specific criteria for an assumable mortgage. The seller must live in the house as a primary residence for a specified amount of time. On the other hand, buyers must go through the standard application process for an FHA loan.
Fortunately for buyers, FHA loans require a smaller down payment of 3.5%, making it a more affordable option for first-time home buyers. Also, FHA mortgages require credit scores of above 580 to apply, making them more accessible to buyers with a less than perfect credit history.
VA loans are available to eligible military members, service members, and their spouses. A buyer who isn’t a service or military member can apply for a VA loan assumption. The lender may need to have the loan approved by the Regional VA Loan Center, depending on how the loan was set up. And this may take additional time to process paperwork.
Rarely, a buyer may find a freely assumable loan that applies to any VA loan closed on or before March 1st, 1988. Sellers that fall in this category don’t have to get lender approval. However, they may still be liable for making payments if a buyer doesn’t pay their mortgage timely. Note that mortgages originated in the late 1980s tend to have higher interest rates, so buyers may want to think twice before taking over these loans.
In most cases, conventional loans aren’t assumable because the mortgage contract contains a due-on-sale clause. This enables the lender to demand that buyer pays the remaining loan amount as soon as the property is sold.
However, if you have a conventional adjustable-rate mortgage (ARM) and meet specific financial qualifications, your mortgage may be eligible for an assumption. Fannie Mae allows for assumable ARMs as long as the borrower doesn’t try to convert the loan to a fixed-rate mortgage.
USDA loans are assumable with new rates and terms. This transfers responsibility for the mortgage debt to the buyer. It also adjusts the debt by re-amortizing it with new terms and rates.
However, USDA loans may be assumable also with the same rates and terms. This is available only in specific circumstances - the assumption is typically reserved only for family members exchanging the title of a property. In this case, the rates and terms of the original mortgage remain unchanged, and no appraisal of the property nor review of the buyer’s creditworthiness is required.
In an environment of rising interest rates, sellers offer assumable mortgages as an incentive to prospective buyers because home sales slow with rising interest rates. That said, if you can offer a mortgage at a lower interest rate to buyers, the savings could be considerable and cost you nothing.
Lenders will check a buyer’s credit score and debt-to-income (DTI) ratio to meet loan requirements. In addition, income information, employment history, and asset verification for a down payment may be required to process the loan.
Buyers should speak with a qualified mortgage professional regarding specific documents required to qualify for an assumable loan. While it’s up to the seller’s lender or agency to approve this loan, finding the right lender can give buyers peace of mind
Buyers may need to bring a substantial amount of money toward closing costs or take out a second home loan. A considerable drawback is that properties with a higher value than the current remaining loan balance demand a larger down payment, making this alternative more costly.
For instance, if the purchase price is $190,000 and the remaining loan balance is $115,000, a buyer will have to bring the difference to closing. Moreover, VA home loans typically require from the buyer a 0.5% funding fee of the loan balance.
Sometimes, assuming a mortgage is a result of a divorce or the death of a family member. In such cases, the lender must ensure that the person responsible for the loan meets loan guidelines.
That said, additional information from the person assuming the loan will have to be verified, similarly to a standard loan application. Creditworthiness, asset verification, and income statements are required to make sure the borrower can make the minimum monthly payments on the loan.
Buyers should consider any additional costs, paperwork, and time frames required to process the loan when determining the pros and cons of assuming a mortgage. In some cases, specialty mortgages require additional time for approval by government agencies or demand higher down payments, depending on the type of the loan.
Assumable mortgage properties for sale have a considerable marketing advantage. Buyers looking for a streamlined home buying process and lower interest rates make assumable mortgages quite appealing.
Lower interest rates mean increased savings for the buyer. In addition, without the necessity for an appraisal, the buyer can save hundreds of dollars rather than pay additional fees.
Additional risks are often associated with assumable mortgages. That’s especially true regarding VA home loans. If a buyer assumes a freely assumable mortgage and transfers ownership to an unknown third party, the seller may be unaware of the transaction. This increases the chance of default payments.
Seller of properties with VA loans may lose their entitlement entirely, negatively impacting their eligibility for future VA loans. To avoid this, you need to obtain a release of liability after closing and deliver proof to the Department of Veterans Affairs to reinstate your entitlement.
Moreover, the buyer is limited to the original terms and conditions of the seller’s lender, meaning they will be unable to search for more competitive rates and terms.
While assumable mortgages offer specific benefits to both sellers and buyers, they also bring many challenges and disadvantages. That’s especially true for sellers.
If you want to bypass this complicated process and all the risks associated with offering an assumable mortgage, you can sell your home to SleeveUp Homes effortlessly and quickly. We will buy your house as-is and for top dollar. All you need to do is request an offer and see how much you can gain.
If you want to sell fast and are worried about how long the traditional process takes, and the commission and fees involved, consider working with SleeveUp Homes.