How Does an Assumable Mortgage Work?

An assumable mortgage is a unique financial tool that allows a new homeowner to take over the existing mortgage of the seller. This can be particularly advantageous in a market where interest rates have risen significantly since the original mortgage was taken out. For instance, many homeowners secured mortgages with rates under 3% in 2020 and 2021, while today’s rates are much higher. By assuming an existing low-rate mortgage, buyers can save a substantial amount of money.

However, it’s important to note that not all mortgages are assumable. Conventional loans typically have a “due on sale” clause, requiring the mortgage to be paid off when the home changes hands. In contrast, government-backed mortgages, such as FHA, VA, and some USDA adjustable-rate mortgages (ARMs), are often assumable.

Pros of an Assumable Mortgage

Assuming a mortgage can offer several significant benefits:

• Cost Savings: Assuming a loan with a lower interest rate can lead to substantial monthly savings. For example, a 3% interest rate on a $320,000 mortgage results in a monthly payment of $1,657.47, while a 6% rate would increase the payment to $2,226.90.
• Increased Buying Power: A lower interest rate can make it feasible to purchase a more expensive home.
• Lower Closing Costs: While there may be a fee for processing the loan assumption, other upfront costs, such as appraisals and loan origination fees, may be reduced or eliminated.

Cons of an Assumable Mortgage

Despite the benefits, there are also some drawbacks to consider:

• High Cash Requirement: Buyers need to cover the difference between the current loan balance and the home’s sale price. For instance, if the home is sold for $450,000 and the loan balance is $200,000, the buyer must pay $250,000 upfront.
• Limited Availability: Not all homes have assumable mortgages, and finding one can be challenging.
• Qualification Requirements: The lender will review the buyer’s financial situation and creditworthiness to ensure they qualify for the loan.
• Longer Closing Process: The process of assuming a mortgage can add complexity and time to the home sale, potentially taking 45 to 90 days to close.

How to Assume a Mortgage

If you’re interested in assuming a mortgage, follow these steps:

1. Look for Homes With Assumable Mortgages

Some companies provide searchable lists of homes with assumable loans, such as AssumeList, Assumable.io, Realtor.com, and Roam. You can also ask your real estate agent to check the multiple listing service (MLS) for homes with FHA, VA, or USDA loans.

2. Understand Your Cost to Close

While closing costs may be lower with an assumable mortgage, there will still be upfront costs. Additionally, you’ll need to cover the difference between the seller’s outstanding balance and the sale price. Consider options like a second mortgage or alternative financing to bridge the gap.

3. Prepare for the Loan Application

The application process for assuming a mortgage is similar to applying for a new one. You’ll need to provide documents to verify your identity, income, and assets, and undergo a credit check. The lender will review your application and eligibility.

4. Close on Your New Home

Once the assumption is approved, you’ll sign the necessary documents to transfer the home’s title and register your purchase. The lender will also provide the seller with a release of liability, clearing them of their mortgage responsibility.

Frequently Asked Questions

What Credit Score Do You Need for an Assumable Mortgage?

The required credit score for an assumable mortgage varies by lender and loan type. Generally, a higher credit score improves your chances of approval.

Do You Need a Down Payment for an Assumable Mortgage?

While you may not need a traditional down payment, you will need to cover the difference between the loan balance and the home’s sale price.

Do Assumed Mortgages Have Mortgage Insurance?

Assumed mortgages may still require mortgage insurance, depending on the loan type and the original terms.

Improve Your Credit When Home Shopping

Whether you’re assuming a mortgage or applying for a new one, your credit history and scores will impact your eligibility. Regularly check your credit report and take steps to improve your credit while searching for your next home.