How does an assumption of a mortgage work?
How do assumable mortgages work? When you assume a mortgage, the current borrower signs the balance of their loan over to you, and you become responsible for the remaining payments. That means the mortgage will have the same terms the previous homeowner had, including the same interest rate and monthly payments.
Keep in mind that the average loan assumption takes anywhere from 45-90 days to complete. The more issues there are with underwriting, the longer you'll have to wait to finalize your agreement. Do yourself a favor and get the necessary criteria organized in advance.
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.
Assumable mortgage benefits can have a better interest rate for the buyer than the market rates. For the seller, an assumable mortgage helps them avoid settlement costs. Generally, most mortgages are no longer assumable. Some USDA, VA, and FHA loans may be assumable if they meet certain criteria.
Additionally, sellers who can offer loan assumption may have a leg up on others because they can provide the opportunity to lock in low interest rates. In some cases, they can even sell their home at a higher price because the lower interest rate offsets the higher principal amount.
With a lower interest rate, you'll save thousands of dollars in interest over the life of the loan. In many cases, the closing costs on an assumed mortgage are lower than they'd be on a conventional loan — an appraisal is typically not required, and the FHA, VA and USDA place caps on some fees for assumed loans.
Cons Of Assumable Mortgages
If a buyer takes over a freely assumable mortgage and transfers ownership to an undisclosed third party, sellers may still be responsible for covering any mortgage payments that the new owner misses. If sellers are unaware of the transaction, there's an increased risk of default payments.
To assume a mortgage, your lender has to give you the green light. That means meeting the same requirements that you'd need to meet for a typical mortgage, such as having a good enough credit score and a low debt-to-income (DTI) ratio.
The buyer takes over the seller's mortgage payments, and the seller receives the value of their equity in the home. An assumable mortgage could have advantages for a buyer, but it also has notable drawbacks.
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.
How much do you have to put down on an assumable loan?
If you choose to get a new loan, you will typically be required to make a down payment of 3.5 to 20 percent or more.
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).
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.
When a buyer buys property and assumes a mortgage, the buyer becomes primarily liable for the debt and the seller becomes secondarily liable for the debt. "Assume" means the buyer takes on liability, and the seller is no longer primarily liable. "Subject to" means the seller is not released from responsibility.
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.
Mortgages that are eligible are considered "assumable." In order to transfer a mortgage, the mortgage lender will typically need to verify that the person or entity that will assume the loan has adequate income and credit history to be able to make payments in a timely manner.
You can take over someone else's mortgage using an assumable mortgage. Assumable mortgages are a great way to get into a home if you're looking to buy or sell, or even just do some property flipping. To finance with an assumable mortgage, you need to contact the current homeowner and make them aware of your intentions.
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.
You can get a mortgage with no job but a large deposit if it makes financial sense for you. If you have a good credit history, lenders may be willing to look past your unemployment if you have cash reserves that will help you pay for the loan.
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.
How often are home loans assumable?
Conventional loans, which are made by private lenders and account for about 70% of new mortgages, are generally not assumable (except in some instances such as death or divorce). Conventional loans usually have a “due on sale” clause that allows the lender to be paid in full when the property is transferred.
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.
| Assumption Type | Processing Time |
|---|---|
| Standard Assumption | 60 – 90 Days |
| Assumption Due to Divorce | 60 – 90 Days |
| Assumption After Death | 30 – 60 Days |
To assume a mortgage, you'll need to provide proof of inheritance to the mortgage servicer. This typically includes: Death certificate. Property deed.
When a borrower assumes a mortgage, most lenders will or will not relieve the original seller from liability on the assumed loan? When a borrower assumes a mortgage, there is little reason for the lender to relieve the original seller from liability on an assumed loan.
