An assumable home loan refers to a kind of mortgage that enables the buyer of a home to pay for the existing loan and the agreed terms of the loan without having to secure a new loan. The buyer is instead responsible for future monthly mortgage payments rather than having to reapply for a loan.
To better understand how assumable home loans work, let us look at some examples below:
In other forms of home buying, the buyer applies and has to qualify for his/her mortgage loan to be able to buy the home. This requires producing evidence of income, possession, credit worthiness, and making a deposit.
But, an assumable home loan means that the buyer takes over the seller’s loan and its terms and conditions. When the buyer purchases the home, they take over the loan balance, interest rate, repayment terms and all other aspects related to the seller’s loan. The buyer is not left on his or her own to complete the mortgage application and approval process.
An assumable home loan means that the new owner of the home can take over the previous homeowner’s loan very easily. The seller remains responsible for paying the monthly mortgage until the property is sold to a buyer. The buyer simply pays the rest of the amount and Loan terms at the closing, as stated in the mortgage note. Usually, the lenders do not demand much documentation from the buyer and approve the loans depending on the buyer’s current fiscal position and credit rating.
Because the buyer does not have to go through a full application process, an assumable loan is a quicker way to own a home. This is a definite advantage as interested buyers can move in especially during periods that mortgage rates are high or when the qualifications for a loan are challenging to meet. Sellers also appreciate assumable loans because it creates a way of advertising their listing to potential buyers.
Kinds of Assumable Home Loans
The most common types of assumable home loans include:The most common types of assumable home loans include:
Conventional Loans – These normal mortgages that are sold to Fannie Mae or Freddie Mac can contain assumable characteristics depending on the time the loan was issued. Indications are that loans that were made before the 1980s would more likely permit assumptions.
FHA Loans – These loans which are underwritten by the Federal Housing Administration are assumable subject to some conditions. For instance, the buyer should be residing in the home and must fulfill credit and income standards.
VA Loans – There are also some instances where assumptions are allowed, for example, the VA home requires seasoning periods before an assumption can be made.
USDA Loans – There are the U. S. Department of Agriculture rural housing loans that can be assumable provided that the buyer meets other requirements such as meeting the rural income requirements.
Occasionally, even adjustable-rate mortgages (ARMs) contain assumable provisions. Instead, buyers assume the existing ARM loan with the respective interest rate and carrying terms that are adjustable.
Benefits for Home Buyers
Assuming an existing home loan offers several advantages for buyers beyond speeding up the financing process:Assuming an existing home loan offers several advantages for buyers beyond speeding up the financing process:
Lower Interest Rates – When buyers assume the seller’s mortgage they are able to get better rates should the seller got his/her mortgage at a good time. This is more economical in the long run.
Lesser Down Payments – Through assumption, buyers may overturn requirement for 20/10 down that new purchasers offer to lenders. There are always reduced costs when one has to spend less cash to make a purchase.
Less stringent qualifying parameters – Credit score and income requirements might also be less stringent when assuming an existing mortgage than when obtaining a new loan. This means more buyers get a chance to qualify.
There are no Origination fees; The lender fees such as application fees, appraisal fees, and origination fees are eliminated by assuming the seller’s mortgage loan. This reduces closing costs.
When there is high interest rate or when credit conditions are tight, an assumable mortgage is the key to homeownership for the buyer. Sellers are also better off because they sell homes more quickly and at a higher price when they include assumable financing.
Downsides of Assumable Mortgages
While assumable home loans have benefits, they also come with risks and downsides to consider:While assumable home loans have benefits, they also come with risks and downsides to consider:
Early Payment Penalties – Most of the existing loans entail special provisions that allow the seller to charge high amounts if the buyer later opts for refinancing. This additional expense could offset any gains from a lower interest rate.
Higher Interest Rates Later – it means buyers gave up on today’s low mortgage rates and could end up paying more in interest if they keep the loan for years.
Missed Tax Benefits – By not originating their own new mortgage, buyers also regress on tax deductions on points, interest and originations fees which will reduce their taxes.
ARM Payment Shock – If borrowers assumed an adjustable-rate mortgage, then future increases in the interest rates may push the monthly payment beyond the borrower’s ability to pay. The home would be in the process of being repossessed, that is, its ownership would already be in the process of being transferred to the mortgage lender.
Temporary Homes – Due to the absence of qualified buyers for assumptions, there are no restrictions on the flip of homes by investor-owners, even if they do not reside in the property. This can lead to the destabilisation of residential properties.
When ALs are beneficial When it is appropriate to use ALs
Despite the drawbacks, an assumable home loan can still make good financial sense in the right situation:Despite the drawbacks, an assumable home loan can still make good financial sense in the right situation:
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This is meant to be your primary residence for a short time – A higher interest rate isn’t a big deal if the borrower only plans on living in the home for a few years.
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You make a sizable down payment – By contributing 20% or more to the cost of the home, you are hedging your bets in case the rates shoot to prohibitive levels later on.
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You intend to make additional payments – Although higher rates, making principal pre-payments can be offset by aggressively paying off the loan.
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There were big sale incentives – If the seller reduced the home price or offered other costs to prospective buyers, then loan assumption tradeoffs were worthwhile.
- Interest rates on mortgages were very low historically – If slightly higher than current rates, assuming an older mortgage with interest rate of 5% or less may be still quite reasonable compared to other options.
In those circumstances, an assumable mortgage gives a quicker method to homeownership. This is true because both the buyers and sellers stand to benefit from the innovation.
How to Know if a Loan is Assumable
Determining if an existing home loan allows assumptions requires checking the mortgage documents or asking lenders directly:Determining if an existing home loan allows assumptions requires checking the mortgage documents or asking lenders directly:
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Check the legal requirements of the mortgage – This legal document will indicate whether loan assumptions are allowed and any restrictions.
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Contact the current lender – Sometimes different banks or credit unions have different policies, so the simplest way of finding out is by contacting the company that is currently handling that loan.
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Consult the home seller – The seller should be aware whether or not the loan is assumable. More than likely they selected it for that very purpose.
- Speak to a real estate specialist – Many agents and real estate lawyers know how to recognize assumable mortgages. They can steer the buyers accordingly.
By doing so, home buyers can easily determine whether it would be financially beneficial for them to buy a home with an assumable loan or whether it would be more beneficial to get a new conventional loan instead. An assumable loan creates possibilities for some buyers. However, the new owner must also accept certain responsibilities that are associated with it.
