Mortgage Assumptions: What are they?
An assumption clause in a mortgage allows the owner/seller of a home to pass the responsibility for their existing mortgage to the buyer of the property. Let’s assume you have a home worth $400,000 with a 30-year FHA loan on it. You have already paid down $100,000 on the home loan and are looking to sell. A buyer may be able to purchase your home and assume your current loan instead of taking out a new home loan. For them to do this they must have the $100,000 you have in equity (and any additional amounts of the purchase price) available to bring to closing and the successful application to take over the remainder of the loan.
What is the benefit?
When assuming a loan the buyer receives the benefit of wherever the seller is in their loan. This includes the number of years left on the loan, whether they have 20 years or 15, they pick up where the seller left off. As well as they keep the original interest rate the seller has. Assumption loans can be popular especially now that interest rates are higher. This can be a great way to market your home if your loan is eligible.
How do I qualify as the buyer?
Typically, if you are qualified/approved for a new home loan, you will qualify to assume a mortgage. The main difference is in your down payment and being able to cover the equity that the seller has into the home.
How do I know my home is assumable?
If you purchased your home on an FHA and VA loan, they are the most common assumable loans. Usually, you need to be living at the property for at least a year before you try to market your loan as assumable. You can call your lender and talk with them about the process.
Pros and Cons?
There are many pros for the buyer when assuming a loan. As we talked about, you will most likely have a lower interest rate, if the seller purchased their home two or more years ago. Anything that is less than the current rates may save you on your monthly payment or allow you to purchase at a higher price range. Another advantage when you assume a loan is that whatever point the seller is currently at, say 5 years into a 30-year mortgage, you will pay off your home 5 years earlier than you would with a new mortgage. When working with the lender they will likely have a point person that takes you through the process once you have worked out the purchase contract with the seller.
As the seller you benefit by having more options that are attractive to buyers. Just a reminder to be sure to investigate whether your home has an assumable loan before you place your home on the market and advertise it that way.
Now you might be asking, are there any cons to assuming a loan?
As the buyer you will want to remember that assuming a loan typically requires a large down payment because you are covering the difference of the equity already paid on the home, plus the difference in the purchase price and the balance of the mortgage. Sometimes you can take out a second mortgage to cover the cost of the equity difference but in that case, you want to make sure you are still saving money as that second mortgage will have the current, higher interest rate. And the lender will take the second mortgage into consideration when qualifying you for assuming the loan. When you work with the lender to assume the loan they will disclose the interest rate, payment amount and what it includes to be sure you want to proceed with the process.
In the end, if you are saving time and money by assuming the loan, and you love the home, it’s a great deal. And if not, there is always the traditional mortgage route you can take. Remember that no matter what, Vanguard Title can help point you in the right direction.
Vanguard Can Help!
At Vanguard, we are here to guide you! We know that buying or selling a home is one of the most important and complex decisions you’ll make. We explain everything at the start of the closing process to minimize any confusion and prevent any surprises along the way. From beginning to end, we keep all parties involved in each transaction informed and updated. And we’re committed to making sure that your overall experience is a positive one. If you need a lending professional to determine your next steps, let us know, we have wonderful clients that can help you along the way.