Do you need a down payment if you assume a loan?
Prepare for the costs – You'll need to make a down payment, but the amount depends on how much equity the seller has. Once the assumption has been approved, you'll also have to pay closing costs, but these are generally lower when you assume a mortgage compared to getting one on your own.
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. If the difference is substantial, the buyer may need to secure a second mortgage.
Applying for a loan assumption is similar to the process for applying for a new mortgage. You will need to complete an application, provide documents, meet our credit, income, and financial requirements, and pay closing costs to get your loan assumption approved.
Loan assumption, however, allows a buyer to take over the current owner's mortgage while the loan's terms — including the repayment period and interest rate — remain the same. Ultimately, it can help people get into a home at a lower interest rate even as the housing market around them becomes more expensive.
There are assumption fees charged by lenders that may be limited by mortgage investor policy and state rules. You'll still pay other closing costs as in any mortgage closing, but these are usually less because there is less paperwork and typically no appraisal fee.
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.
An assumable FHA mortgage works in the same way, but a buyer will need to meet certain criteria before taking over an existing FHA mortgage. Among these criteria, a buyer will need a credit score of at least 580 and a debt-to-income ratio of 43% or less.
Note, however, that your second mortgage will likely come from a different lender than the one that owns the mortgage you're assuming. So you have to work with the current mortgage lender and make sure it's willing to play ball. You'll also likely need a credit score of 680 or higher to qualify for a home equity 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.
Calculation. The mortgage assumption value can be calculated as the net present value of the sum of the future monthly payment savings due to the assumable loan rate being lower than the prevailing new loan interest rate.
How common is it to assume a mortgage?
However, you have other factors to consider before building your homeownership dreams around assuming a mortgage with a 3% interest rate. For one, most mortgages aren't assumable. Typically, only government-backed loans are assumable and the majority of mortgage loans are conventional.
Most importantly, an alienation clause prevents a homebuyer from assuming the current mortgage on the property. Without this clause, the new owner could assume the existing mortgage and repay it at that interest rate rather than obtaining a new loan at prevailing rates.
An assumable mortgage can provide several benefits for the buyer and the seller, depending on the situation. First, for the buyer, the seller's mortgage may offer a lower interest rate than the current market rates, which can save the buyer a significant amount in interest costs over the life of the loan.
The VA doesn't set a minimum credit score, but lenders can require a certain credit score, commonly 620 or higher. In addition to paying the seller for their equity to assume a VA loan, you'll need to pay a processing fee of about $300 and a funding fee of 0.5% of the loan balance.
VA mortgage: There is no minimum credit score set by the Veterans Administration, but individual lenders typically require a score of 620. FHA mortgage: To assume an FHA mortgage, buyers must have a FICO® Score of 580 or higher. USDA mortgage: A buyer needs a FICO® Score of 640 or higher to assume a USDA mortgage loan.
Your loan documents should indicate whether your mortgage can be assumed by your buyers. If your loan is government-backed, it's assumable under the right circ*mstances. You must be current on your loan payments to offer an assumption. Make sure you understand your loan terms and can explain them to your buyers.
If the current loan terms are favorable (primarily the interest rate), this can be an easy way to protect those favorable terms instead of refinancing, perhaps at a higher interest rate. In most cases, assumption fees are less than the overall cost of a refinance.
Additionally, the lender who has to approve the assumption typically doesn't make money on the assumption (no new interest rate, no new client), so therefore, lenders aren't keen on assumptions and they end up taking longer to process (anywhere from 60-120 days).
Loan Assumption Process
The process isn't just long; it's like running a marathon with hurdles. You need to qualify, just like a new mortgage, and swim through a sea of paperwork.
Processing an Assumption
Once accounting for the $300 VA or $900 FHA assumption fee charged to the borrower, this means that lenders report losses of between $1,220 and $2,830 per assumption.
Is FHA always 3.5% down?
FHA loans require a minimum 3.5 percent down payment for borrowers with a credit score of 580 or more. Borrowers with a credit score of 500 to 579 need to put 10 percent down to get an FHA loan. Conventional conforming mortgages only require 3 percent down, and VA and USDA loans require no down payment.
- Your credit score must be at least 580 to make a 3.5% down payment or between 500 and 579 to make a 10% down payment.
- Your debt-to-income (DTI) ratio must be 43% or less.
- Your monthly mortgage payments can't exceed 31% of your monthly gross (aka pretax) income.
If the mortgage loan is assumable, a seller can sell their home to a qualified buyer, allowing the buyer to purchase the home by way of assuming responsibility for the seller's loan terms and remaining balance.
You can check the loan documents to see whether assumptions are permitted. The loan document will typically state whether or not the loan is assumable under the "assumption clause." The terms may also appear under the "due on sale clause" if loan assumption isn't permitted.
- Contact your lender. Before doing anything else, reach out to your lender to check that your mortgage is transferable.
- Consider legal representation. Transferring a mortgage can be complicated. ...
- Begin the transfer process. ...
- Complete the transfer.
