As mentioned, lenders must approve an assumable mortgage. If done without approval, sellers run the risk of having to pay the full remaining balance upfront. Sellers also risk buyers missing payments, which can negatively impact the credit score of both the buyer and seller.
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.
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.
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. Sellers should work with a real estate attorney to ensure they are not held liable for the loan after it is assumed.
The seller's lender will put you through an approval process that requires documentation and information typical of a mortgage application. Closing costs on assumed government-backed loans are cheaper than the 2% to 6% you'd normally pay to close a loan.
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.
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 assume a loan, you must qualify with the lender. If the price of the house exceeds the remaining mortgage, you must remit a down payment worth the difference between the sale price and the mortgage.
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.
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.
Federal Housing Authority (FHA) loans: According to the FHA, loans are assumable when both transacting parties meet certain criteria. For starters, the home must be used as the primary residence. The loan servicer must also check the buyer's credit to ensure they meet the loan requirements.
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.
"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."
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.
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.
Most lenders and title companies do not accept credit cards for your closing cost payments, but you may be able to use one to pay certain fees leading up to closing. Speak with your lender to learn more about your options.
An assumable mortgage could be an option worth considering, for example, if you can both secure a lower rate and also afford to pay the difference in the current seller's mortgage balance and the current value of their home, Fate Whiten, a licensed Realtor at Keller Williams, says.
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.
Only government-backed mortgages, from the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture, are assumable. Conventional mortgages typically have to be paid off when the house is sold.
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.
Sellers use assumable mortgages as promotional tools to attract buyers to their homes. They can also streamline the home sale process. The main difference between an assumable mortgage and a traditional one is that the buyer does not need to apply for the mortgage to take it on.
What does a negative cash to close mean? If your estimated cash-to-close amount is negative on your loan estimate, it means the sum of your deposits and credits is higher than the sum of your down payment and closing costs. In short, it means the buyer will get money back on closing day.