What is an assumable mortgage?
An assumable mortgage allows a homebuyer to take over an existing home loan (typically government-backed) from a seller, assuming the established interest rate, remaining loan term and principal balance. This is common in situations of death and divorce when a surviving spouse keeps the home and continues to make the mortgage payments.
When mortgage rates climb as they have been for a few years, assumable mortgages are especially attractive to homebuyers. If the seller got the mortgage when average mortgage rates were around 3%, you could take over that favorable rate and avoid paying the 6% to 8% rates you’ll find on newly originated loans in 2024. This sounds AWESOME for home buyers but it's not a quick and easy process and there are a few big considerations.
When you buy a home with an assumable mortgage, the seller’s mortgage is transferred into the buyer’s name. The basics of the mortgage — its interest rate, balance, remaining term and monthly dues — remain the same; only the name of the responsible party changes. You assume the mortgage for the current amount owed, which is likely much less than the home’s sale price, especially with the price appreciation experienced in the past few years. Therefore, you must pay the seller for their equity (the difference between the home’s appraised market value and the balance of any mortgages) in cash or by borrowing.
So, if the home is valued at $600,000 and the current mortgage balance is $450,000, the homeowner has $150,000 in equity ($600,000 – $450,000 = $150,000). In this example, you’d need to make a cash payment of $150,000 at closing to compensate the seller for their equity stake. If you plan to use a loan to cover the equity, you must have that lined up before closing on the assumed mortgage.
How do you qualify to assume a seller's mortgage?
You’ll need to provide the same information you’d supply with any new mortgage application, including:
- A government-issued ID
- Tax returns for the previous two years
- Proof of income, such as pay stubs for the past 60 days
- Bank and investment account statements showing your assets
So what kind of homes would offer an assumable mortgage?
In most circumstances, the only loans that are assumable are those backed by government agencies, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the US Department of Agriculture (USDA). In most cases, conventional mortgages aren’t assumable. Mortgages that aren’t backed by a government entity typically have “due-on-sale” clauses that require the outstanding debt to be repaid when the property is transferred to another person.
What are the challenges of assuming an existing mortgage?
Without a large down payment, you may have to take out a second mortgage to pay the seller for their equity. That presents two challenges:
- Getting the original loan servicer to agree for you to use a second mortgage
- Finding a lender that will provide a second mortgage, likely a piggyback mortgage
The closing timeline:
- Many loan assumptions take longer than a traditional loan to close; some up to 90 days.
Lender choices:
- Buyer can’t shop around for a mortgage lender
Where can you find homes with assumable mortgages?
The MLS has a checkbox option for the seller's agent to check if the agent confirmed the mortgage qualifies to be assumed AND the seller is willing to go through the assumption process with a buyer.
Ready to invest and looking for an assumable mortgage?
Check out this well maintained, 4-plex located in a very convenient location with two open units for owner occupant opportunity!
3114 23rd Avenue S, Minneapolis, MN 55407-1910
Need a pre-approval for this property? Contact Kevin Jaunich, Caliber Home Loans, 763-245-7645
