Do you need a down payment when assuming a mortgage?
Conventional loans cannot be assumed, for example, but FHA and VA loans can. Not just anyone can assume an existing mortgage. You still have to apply with the lender and qualify for the loan. You generally need to make a down payment when assuming a mortgage, and it may be larger than expected.
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.
Submit your application – The process of assuming a mortgage could look different from lender to lender, but in general, you'll need to fill out an application, provide proof of income and assets and submit to a credit check.
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.
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.
The exact amount of the assumption fee can vary depending on the lender and the specific mortgage being assumed, but it typically falls in the range of 0.5% to 1% of the loan amount. For example, if a mortgage being assumed has an outstanding balance of $300,000, the assumption fee could range from $1,500 to $3,000.
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.
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.
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.
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.
Is it better to assume a mortgage or refinance?
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.
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.
How much does a loan assumption cost? You'll have to pay closing costs on a loan assumption, which are typically 2-5% of the loan amount. But some of those may be capped. And you're unlikely to need a new appraisal.
The seller can share in the savings that the buyer receives with their lower interest rate. They can, for example, charge a higher price for the property, require the buyer to pay the closing costs that the seller may incur, or demand cash payment for part of the buyer's savings over an agreed-upon time frame.
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.
As long as your situation fits one of the exceptions mentioned in the due-on-sale clause, another person can take over and assume responsibility for the loan. If you have an adjustable-rate mortgage or a government-backed mortgage (including FHA, VA, and USDA mortgages), you might have an assumable mortgage.
Averaging 30-60 days to closing, assumable VA loans are less stressful and demanding, but they still take some time to be approved.
Example of an Assumption Clause
Assuming the current market interest rate is 4% and the new buyer takes out a 30-year fixed-rate mortgage for the same $240,000 loan, the balance due (with interest) at the end of that time would be about $412,500.
The most important document in the loan assumption process is the deed of trust, which adds your name to the mortgage and absolves the original borrower of any obligations under the agreement, assuming a novation. All parties will be required to sign the final documents.
All FHA insured mortgages are assumable. However, FHA has placed certain restrictions on the assumability of FHA-insured mortgages originated since 1986. Depending on the date of loan origination, a creditworthiness review of the assumptor by the lender may be required.
What is the debt to income ratio for a loan assumption?
A good rule of thumb is to keep the debt-to-income ratio below 36 percent. This will increase your chances of getting a loan. For example, if you pay $1,500 a month for your mortgage, another $200 a month for an auto loan and $300 a month for remaining debts, your monthly debt payments add up to $2,000.
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.
To assume a mortgage, you'll need to provide proof of inheritance to the mortgage servicer. This typically includes: Death certificate. Property deed.
