You’re going to hear a lot of different terms when you start dealing with the real estate industry, and more specifically, mortgages – fixed rate, ARM, and then there’s the assumable mortgage. How does an assumable mortgage work? An assumable mortgage is where a buyer can take over or assume an existing loan with the same terms, as long as the buyer agrees to make all future payments, meets the creditworthiness standards and the lender is on board with the agreement.
Obviously, this can be a positive outcome for the buyer if the seller’s current mortgage rate is better than what the buyer can get on their own, or is lower than current market rates. Buyers will also have fewer costs to deal with during escrow, and taking on an assumable mortgage can also mean a buyer might land a price closer to the market value due to the assumed interest rate. But as with anything, there can be some pitfalls. It helps to know what you’re getting into before you make a final decision. Understanding the assumable mortgage process doesn't have to be difficult, and you shouldn't feel like you have to do it alone.
What if the home is worth more than the current mortgage the buyer is trying to assume? That means the buyer may have to work with their lender to secure a second mortgage, which reduces the benefit of assuming a loan or come up with the difference in cash.
The seller will also need to make sure they’re completely released from the terms of the loan to ensure they’re not on the hook for anything related to the house after the mortgage is assumed by the buyer. If the seller isn’t properly removed from the loan, they could be held liable if the buyer isn’t able to keep up on their mortgage payments. The seller will need to make sure they have an official release that absolves them of any future issues.
Both Federal Housing Administration Loans and VA mortgages are assumable, as long as the buyer and seller meet the agency’s list of conditions and requirements. If the seller has a VA loan that was procured before March 1, 1988 it can be assumed without any additional conditions on the buyer’s end. However, both the FHA and VA have different conditions, requirements and timelines that dictate the terms of assumability, so check with your lender on which type of loan you’re set to assume. On the seller’s end, if not fully released from the obligation, they’ll still be on the hook in the instance that the buyer isn’t able to keep up on their payment.
For most FHA and VA loans the buyer needs to be creditworthy, have the ability to repay the loan, and be approved by the lender. Each loan has particular parameters that need to be met. FHA requires certain income levels, occupancy requirements, and credit score standards. While the VA loan has specific income and credit requirements, it also has conditions related to both veteran and non-veteran buyers who may want to assume the loan. If ever you’re confused or in doubt about your ability to take on an assumable mortgage, talk more with your lender. They can help steer you in the direction that’s best for you.