The assumption fee is the charge paid by the buyer who assumes a mortgage on a property. This fee most commonly occurs when someone buys a property that has not been completely paid off to the bank yet.
It depends. A mortgage takeover can be beneficial in certain situations, such as when the seller's original mortgage has a lower interest rate than what is currently available on the market. However, the process of assuming a mortgage can be complex and costly, and not all buyers will qualify.
When you assume a loan, the mortgage may not cover the cost of the home. This means you may need additional financing or a down payment, along with the payment you make to the seller.
Calculation. The mortgage assumption value can be calculated as the net present value of the sum of the future monthly payment savings due to the assumable loan rate being lower than the prevailing new loan interest rate.
Unless you're assuming a mortgage privately from someone you already have a close relationship with, you'll likely go through underwriting to transfer financial responsibility. The seller's lender will put you through an approval process that requires documentation and information typical of a mortgage application.
You'll have to pay closing costs on a loan assumption, which are typically 2-5% of the loan amount. But some of those may be capped. And you're unlikely to need a new appraisal. So you may pay less on closing than a 'typical' home purchase — but only a bit less.
A disadvantage is when the home's purchase price exceeds the mortgage balance by a significant amount, requiring you to obtain a new mortgage. Depending on your credit profile and current rates, the interest rate may be considerably higher than the assumed loan.
You'll need to qualify for the mortgage that you're assuming, which means you may need a credit score of at least 500 for an FHA loan or 620 for a VA loan. Although a higher credit score won't lead to a lower interest rate—because you're taking over the current loan's rate—it might increase your chances of approval.
Typically, removing a name from a mortgage could require you to pay off the loan in full or refinance it with a new loan. But, there are alternatives where you can take over the loan without paying off it off or refinancing. These could include mortgage assumption, loan modification and bankruptcy.
You'll be asked to provide extensive documentation, much like you would when securing financing the traditional way. That's why it's important to have copies of pay stubs and W-2's ready ahead of time. Keep in mind that the average loan assumption takes anywhere from 45-90 days to complete.
In terms of taxes, assuming a mortgage may have implications related to property taxes, mortgage interest deductions, and potential gift tax considerations. Seeking guidance from a tax professional will help you navigate these complexities and ensure compliance with tax laws.
The Drawbacks of Mortgage Assumption
In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties' credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.
Loan types: Not all loans are assumable. Conventional mortgages are usually excluded, meaning refinancing may be the only option. FHA, VA and USDA loans, on the other hand, often allow assumptions. Credit impact: Refinancing involves a hard credit inquiry, which can impact your credit score.
4-1 GENERAL. All FHA insured mortgages are assumable.
You'll typically only be able to transfer your mortgage if your mortgage is assumable, and most conventional loans aren't. Some exceptions, such as the death of a borrower, may allow for the assumption of a conventional loan. If you don't have an assumable mortgage, refinancing may be a possible option to pursue.
To assume an FHA loan, you must also pay the lender an assumption fee and closing costs. Assumption fees range from 0.05% to 1% of the original loan amount, whereas closing costs range from 2% to 5% of the remaining loan balance. These fees are typically paid upfront at the time of closing.
The states with the highest share of assumable mortgages are Alaska (39.3%), Wyoming (34.4%), Virginia (34.1%), Nevada (32.8%), Oklahoma (32.5%), Maryland (32.1%), Georgia (31.5%), Louisiana (31.5%), New Mexico (31.4%), and Delaware (30.8%).
Plus, without the need for an appraisal, buyers can save a few hundred dollars upfront. Limited closing costs: When home buyers assume a mortgage, the FHA, VA and USDA limit how much they'll have to pay in closing costs. As a result, a home purchase is more affordable.
The mortgage balance, interest rate, and repayment schedule all carry over to the buyer. However, only Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans can qualify. Conventional mortgages cannot be assumed.
You can only use an FHA loan to buy an investment property if the property is also your primary residence and meets all other FHA loan criteria.
You'll have to assume mortgage insurance payments: Most FHA and all USDA loans will include a monthly mortgage insurance payment in addition to the mortgage payment itself. If you're assuming a VA backed mortgage, you'll pay a 0.5% one-time funding fee upfront.
Government Assistance
For example, California has the CalHFA program available to qualified low-income buyers. The program provides grants and loans to eligible borrowers, and the money can either directly subsidize part of a down payment, or cover the entire thing, depending on certain factors.
How much are closing costs? Average closing costs for the buyer run between about 2% and 6% of the loan amount. That means, on a $300,000 home loan, you would pay from $6,000 to $18,000 in closing costs in addition to the down payment.