Additionally, sellers who can offer loan assumption may have a leg up on others because they can provide that opportunity to lock in low interest rates. In some cases, they can even sell their home at a higher price because the lower interest rate offsets the higher loan amount.
Assumable Mortgage Transfer Approval
The final decision over whether an assumable mortgage can be transferred is not left to the buyer and seller. The lender of the original mortgage must approve the mortgage assumption before the deal can be signed off on by either party.
Cons of an Assumable Mortgage
Sellers may lose VA their loan entitlement: Anyone can assume a VA loan, and eligible buyers can substitute the seller's entitlement with their own. However, if the buyer isn't eligible for a VA loan, the seller's VA loan entitlement stays tied to the mortgage until it's paid off.
Buyer needs to pay the seller their equity stake: While you'll take over the seller's mortgage and repay that over time, you're only assuming their outstanding balance. You'll still need to pay the seller the remaining cost of the home, either out of pocket or with another loan.
Advantages of Assumable Mortgages
There are also fewer closing costs associated with assuming a mortgage. This can save money for the seller as well as the buyer. If the buyer is gaining a lower interest rate, the seller may find it easier to negotiate a price closer to the fair market asking price.
An assumable mortgage allows a home buyer to not just move into the seller's former house but to step into the seller's loan, too. This means that the remaining balance, repayment schedule and rate will be taken over by the new owner.
You can get approved with a credit score of 580. Anyone is eligible to assume a VA loan or any other type of government-backed mortgage. Assumable loans are authorized by the HUD, and the loan is in the buyer's name at closing.
But you'll need to make a much larger down payment — at least 15%, according to Tozer — when assuming one of these loans. The reason is, an assumable loan rarely covers the full purchase price of the house. That means the buyer needs to come up with the difference.
An assumable mortgage will let a borrower transfer the mortgage to someone else even if they haven't fully paid it off. The new borrower then takes over the loan, assuming the same terms, rate, and remaining balance as the original borrower.
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.
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.
Quick google searches reveal that 60% of homes have mortgages and 23% of those mortgages are assumable (as of May 2024).
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.
"In the current mortgage interest environment ... it is nearly always better to assume the mortgage rather than refinance," says Julia Rueschemeyer, a Massachusetts-based attorney specializing in divorce mediation. "Refinancing involves thousands of dollars in transaction fees and higher interest rates."
A lender facing the possibility of the borrower's foreclosure may consider an assumption as an economic alternative to the foreclosure process. The broker may consult with the lender, with the owner's permission, to see if the loan might be assumed and , if so, under what terms and conditions.
The Drawbacks of Mortgage Assumption
Assuming a mortgage isn't a walk in the park. Buyers must provide extensive documentation and undergo a lengthy approval process, often taking up to 90 days. This can be cumbersome and time-consuming, potentially delaying the home buying process.
As a seller, an assumable mortgage allows you to transfer your current mortgage to your buyer, potentially allowing them to take advantage of your favorable interest rate.
In theory, mortgage loan assumption is the simplest solution of all. That's because it doesn't require refinancing your mortgage. You inform your lender that you are taking over the mortgage and want a loan assumption.
Assuming a mortgage involves closing costs ranging from 2% to 5% of the home's purchase price. VA loan closing costs may be as low as 1% with a VA funding fee, which is usually 0.5% of the principal loan balance. Closing cost fees are paid upfront in addition to the assumption fee and compensation equity.
You Pay the Seller Instead of Making a Down Payment
If you choose to get a new loan, you will typically be required to make a down payment of 3.5 to 20 percent or more. When you assume a loan, you do not have to make a down payment.
In 2023, 3,825 FHA loans were assumed, compared with 2,221 in 2022. In just the first five months of 2024, an additional 3,477 FHA assumable loans were recorded, putting borrowers on track to more than double last year's total. VA loan assumptions recorded an even steeper spike, from 308 in 2022 to 2,244 in 2023.
The due-on-sale clause protects your lender by preventing prospective buyers from assuming your mortgage.
You can take over someone else's mortgage using an assumable mortgage. Assumable mortgages are a great way to get into a home if you're looking to buy or sell, or even just do some property flipping. To finance with an assumable mortgage, you need to contact the current homeowner and make them aware of your intentions.