A family member can assume an existing mortgage from a relative who has died, for instance, or, if one person is awarded sole ownership of a property in divorce proceedings , that person can assume the full existing mortgage themselves.
In theory, any type of home loan could have an assumable mortgage clause. However, only three types of loans typically have this feature:. In order for you to assume a mortgage, your lender has to first give you the green light.
Here are the steps to take. How We Make Money. Zach Wichter. Written by. Zach Wichter is a mortgage reporter at Bankrate. Edited By Suzanne De Vita. Edited by. Suzanne De Vita. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.
Share this page. Bankrate Logo Why you can trust Bankrate. Bankrate Logo Editorial Integrity. Key Principles We value your trust. Bankrate Logo Insurance Disclosure. What is an assumable mortgage? Read more From Zach. You may also like New VA rules aimed at curbing predatory lending for cash-out mortgage refinances. Mortgage rates crush it again, plunge to a new all-time low. Lower interest rate: An assumable loan summons a straightforward advantage for the home buyer, says Jim Sahnger, a mortgage originator for C2 Financial Corp.
Lower closing costs: Also, it costs less to assume a loan than to get a new mortgage, lenders say. Mortgage closing costs usually total several thousand dollars. But sellers who have VA loans can hit a snag when buyers assume their mortgages. With a VA loan, the government guarantees that it will repay part of the balance if the borrower defaults. The VA, which limits this guarantee, calls its dollar amount the borrower's "entitlement.
Because the entitlement remains with the assumed loan, the seller might not have enough entitlement remaining to qualify for another VA loan to buy the next home. A seller can escape this predicament by selling to a veteran or member of the military who is eligible to get a VA loan. The buyer can then substitute his or her entitlement for the seller's. In such a case, the VA restores the seller's full entitlement. Large down payment: Rising home values can torpedo mortgage assumptions.
To understand why, remember that when a buyer assumes a mortgage, it's like stepping into the seller's mortgage, which may no longer cover the cost of the house. The buyer would assume that amount. The buyer will have to pay the difference. In most cases, that means getting a second mortgage, "which usually has considerably higher interest rates," Barone says.
A second mortgage likely carries closing costs, further undermining the assumable loan's advantage. Because home price appreciation can snowball quickly, buyers have an easier time assuming mortgages that are just a few years old, he says.
Mortgage insurance: FHA loans can present a drawback. Their monthly mortgage insurance payments last for the life of the loan and can be eliminated only by refinancing the loan. Those monthly payments negate some of the benefits of assuming the loan's lower interest rate. Assuming a mortgage requires the lender's approval.
If a buyer and seller enter into an assumption informally, without telling the lender, they take a risk. After the lender finds out, it can demand payment of the full loan amount immediately. For an FHA loan, the down payment is typically 3. Calculate how much you must pay upfront. If the current owner has equity in the home, he may expect the difference between the amount owed and the current value. If you do not have the funds to pay the owner, some lenders will allow you to borrow the money by taking out a second mortgage.
Qualify with the lender. The lender will send an assumption package for you to complete and return. Requirements to assume a loan are the same as if you were taking out a new loan. Lenders evaluate your credit, debt-to-income ratio, and resources to determine if you are a good candidate.
Pay the down payment, closing fees and mortgage buyout costs.
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