At the end of 2023, more than half of U.S. homeowners had rates under 4% and sites with listings for homes with assumable mortgages currently boast rates as low as 2%. Assuming one of these loans, rather than taking out a brand-new mortgage, could save you tens of thousands of dollars over the life of that loan.
Once the assumption has been approved, you'll also have to pay closing costs, but these are generally lower when you assume a mortgage compared to getting one on your own.
The risks of assumable mortgages for sellers
Sellers are often apprehensive to agree to an assumable mortgage because they could be legally and financially responsible if the buyer defaults on the loan. Their credit scores could be affected.
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.
Assumable refers to when one party takes over the obligation of another. In terms of an assumable mortgage, the buyer assumes the existing mortgage of the seller. When the mortgage is assumed, the seller is often no longer responsible for the debt.
The first step is to reach your mortgage contract and confirm that loan assumption is possible. Some loans will allow another party to assume a mortgage, while others limit what sellers can offer. During this time, you also might want to decide whether marketing an assumable mortgage is a good option.
In some situations, a buyer may be able to assume the seller's existing mortgage. The buyer takes over the seller's mortgage payments, and the seller receives the value of their equity in the home. An assumable mortgage could have advantages for a buyer, but it also has notable drawbacks.
Miscommunication and Misunderstanding: Assumptions often play a role in communication breakdowns. If people assume that others understand their intentions, it can lead to confusion and conflict when those assumptions are incorrect. This can strain relationships, both personal and professional.
VA loans and USDA don't require any down payment and you can get an FHA loan for as little as 3.5% down. 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.
"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."
Assumable mortgage benefits can have a better interest rate for the buyer than the market rates. For the seller, an assumable mortgage helps them avoid settlement costs. Generally, most mortgages are no longer assumable. Some USDA, VA, and FHA loans may be assumable if they meet certain criteria.
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.
FHA Loan Assumption Requirements
Buyers wishing to assume an FHA mortgage must have a minimum credit score of 620, although buyers with scores above 580 may be eligible with additional restrictions.
To finance with an assumable mortgage, you need to contact the current homeowner and make them aware of your intentions. You'll also need to ensure that they're willing to transfer their loan over to you (and vice versa). If they're happy with the deal, then it can be as simple as signing on the dotted line!
When we assume something, sometimes our minds are already made up before knowing the details. Assumptions can also lead to expectations, which can lead to disappointment, which can leave us feeling bad. The problem with making assumptions is that we are likely to believe they are true when, in fact, they may not be.
The RAT (Riskiest Assumption Test) is an approach that is used for testing ideas and hypotheses. The main goal is to gather the feedback of users as quickly as possible and check the idea's feasibility before the product is launched.
When you assume, you impart your own perspective, motivations and values upon a situation. Through that lens, if you're not careful, you can distort your perception of reality, which can lead to irrational decisions.
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.
Closing costs for buyers include fees paid to the mortgage company for originating the loan, legal fees paid to the attorney who handles the real estate transaction, homeowners association fees, and pre-payments for homeowners insurance and property tax.
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.
Increased Financial Risk
Sellers often face additional risks with assumable mortgages, especially when it comes to VA loans. If a buyer takes over a freely assumable mortgage and transfers ownership to a third party, sellers may still be responsible for covering any missed mortgage payments by the new owner.
When you assume a loan, you do not have to make a down payment. Instead, you pay the seller compensation for the equity they have built in the home, or the difference between their mortgage balance and what the home is worth.
An assumable mortgage can be a major selling point for a home, especially if it has a very low interest rate. However, selling a home with an assumable loan can be a lengthy and complex process.