The assumable mortgage has been around for ages. The tricky lending practice of loan assumption became popular in the 1970s. During the decade of shag carpets and lava lamps, mortgage rates skyrocketed, and homebuyers began the practice of assuming existing loans associated with low-interest financing. Early on, assumable mortgages provided options for non-qualifying first-time homebuyers and other ineligible borrowers.
In those days of yesteryear, homes were easy to acquire through loan assumption, and there were few laws or regulations to safeguard buyers and homeowners. However, in the late 1980s, laws were put into place requiring buyers to meet specific loan eligibility requirements.
Next, the market began to crash, and home sales plummeted. Mark Perry, a scholar at the American Enterprise Institute (AEI), reports, “From the peak of 4 million existing home sales in 1978, there was a 50% drop in home sales over the next four years, so by 1982, only 2 million homes were sold. It took almost two decades, or until 1996, before home sales exceeded the 1978 level of 4 million units.”
Wait, are we still discussing the climate in 1970 or today’s market and the current mortgage rates? The bottom line is that desperate times call for ingenuity, and the evolution of assumable mortgages originated from a nationwide spike in interest rates. Today, some experts predict the rise of regulated mortgage assumptions, while others caution against the practice.
At the core, and throughout the progression of American home financing, one fact remains: mortgage regulations, best-practice lending, and loan eligibility requirements exist for a reason, and the primary purpose for underwriting, vetting real estate professionals, and in-depth property inspections is to mitigate risk for both the buyer and the loan payoff.
Defining the basics.
To kick things off, let’s talk about what an assumable mortgage is. A surface-level explanation is that assumable mortgages allow new borrowers to take over an existing loan from a current borrower. An in-depth explanation begins with two parties, the original borrower and the new homebuyer. The two parties agree to allow the new buyer to assume the current loan balance and existing interest rate.
The new homebuyer becomes responsible for the terms of the repayment period and remaining mortgage payments associated with the original loan. The subsequent buyer can avoid obtaining their new loan by assuming the previous homeowner’s principal balance and any debt associated with the original loan. Moreover, any outstanding payments and fees related to the original loan transfer to the new home buyer’s mortgage balance.
Assuming loans sounds incredible. Why don’t we hear about more people doing it? Let’s discuss the advantages and disadvantages of assumable mortgages to demystify the practice of assuming home loans.
In the contemporary home financing landscape, Americans are struggling with inflation costs, elevated home prices, and soaring interest rates. Are assumable mortgages a solution? Admittedly, the homeownership concept of sidestepping the need for a new mortgage by simply assuming the loan balance of an original buyer’s loan is intriguing, especially considering the interest rate benefits associated with loan assumption.
Speaking about advantages, since assumable mortgages don’t require real estate agents, buyers often bypass paying costly commission rates. Another additional benefit is that access to lower rates equates to more affordable monthly payments. Because mortgage assumption doesn’t require new loan origination, homebuyers avoid many of the charges associated with traditional lending practices.
Assumable mortgages have various rules and regulations regarding loan assumption, including eligibility requirements and the approval process. Many criteria vary depending on the loan agreement terms and applicable state laws. Whether a new homebuyer uses conventional lending or loan assumptions, traditional credit score requirements still stand. Depending on the financial agreement and loan assumed, credit remains the determining factor for loan approval and rates. As a result, low credit scores result in higher interest rates, and low scores hinder the loan assumption process altogether.
Popular Types of Assumable Mortgages.
Government-backed loans, offered by the Federal Housing Administration (FHA loans), require both the seller and the new home buyer to meet specific eligibility requirements for assumable mortgage approval. For example, the home must remain the primary residence of the borrower.
Department of Veterans Affairs (VA loans) and USDA Loans (offered by the US Department of Agriculture) are typically assumable. To assume a conventional existing mortgage, borrowers often need to provide loan qualification through a lender to prove creditworthiness and mortgage eligibility. VA homeowners must carefully research their loan and the new homebuyer to ensure the mortgage assumption doesn’t affect their VA entitlement status.
Due-on-Sale Clauses
Most conventional loans are not assumable and require the original borrower to fulfill their loan terms. Primarily, most loans come with a due-on-sale clause. This clause allows the lender to demand full payment of the original loan. For the home seller to transfer or sell the property, they must pay off the remaining loan amount of their conventional mortgage, or the new homebuyer may receive a bill for the total loan amount. In most cases, the potential risk outweighs the benefit.
Of course, with every rule, there is the exception. Regarding conventional adjustable-rate mortgages, Fannie Mae-backed loans will occasionally allow an assumable mortgage if new homebuyers agree to remove the option for converting these types of loans to a fixed rate. Some loans allow adjustable-rate mortgages to be assumed once the loan surpasses the initial fixed-rate time frame.
Fees and Considerations
- Down payment: Buyers may be required to make a down payment or, in some cases, pay the original owner out of their loan, which impacts budget and financial planning. (Assumable mortgages typically don’t require closing costs.)
- Interest rates: If an assumed mortgage has higher interest than the current rate, it may not be worth it. However, if the interest rate is lower, mortgage assumption provides an advantage.
- Assumption Fees: Although the exact amount charged can vary from a flat fee to a percentage, the typical cost ranges from 0.5 to 1% of the loan amount.
- Common Fees: Appraisals, loan origination, credit check, appraisal, title, recording, legal taxes, insurance and inspections.
How does PMI (mortgage insurance) work with mortgage assumption?
Regarding PMI (mortgage insurance and loan assumption, the primary factor is loan to value (LTV). A new home appraisal will determine the equity stake in the property versus the remaining borrowed amount. In short, is the current equity balance of the property greater than 20% of the remaining mortgage? If the original borrower did not initially put 20% down to acquire their loan, and the mortgage is currently insured with PMI, the new home buyer will need to either carry over the PMI or provide money to cover the difference. Each situation is unique, and utilizing a mortgage insurance professional is best.
VA Loan Entitlement and Eligibility Status
VA loans are government-backed loans that finance properties for eligible veterans, active-duty service members, reservists, National Guard members, and certain surviving spouses. These loans offer several benefits, including no down payment requirements, competitive interest rates, and no private mortgage insurance (PMI) premiums. VA loan eligibility is an incredible resource. Concerning entitlement, this is the dollar amount the Department of Veterans Affairs guarantees on each loan and the maximum amount a veteran can borrow before paying down payments themselves. Since each VA-financed property reduces the veteran’s maximum entitlement allowance, many Veterans will only consider the VA-to-VA loan assumption.
Property Inheritance
Although most conventional loans are not assumable, successorship in interest is an exception to the rule. When a family member inherits a conventionally financed property, it is possible to assume the conventional loan. Depending on the eligibility criteria of the recipient and their approval processes, these family members are often permitted to continue making payments to retain ownership of the property. Since each state has specific laws and regulations, seeking professional advice on a case-by-case basis is recommended.
Benefits of Assumable Mortgages
Original Buyer Benefits.
- If a homebuyer has money upfront, the home seller can receive a large lump sum payment for their home equity.
- Higher sale prices and less foot traffic in and out of the property.
- Less paperwork and requirements mean faster closing times.
New Homebuyer Benefits
- Assumable mortgages provide lower rates than traditional loans.
- Lower interest rates mean lower monthly mortgage payments.
- The process is fast and efficient since the buyer and seller work together.
How to find assumable mortgages – 4 Common Practices
- Start by contacting local mortgage brokers, banks, and loan officers. Ask if they offer assumable loans.
- Begin with research and evaluate each lending professional, and compare rates and terms to find the perfect fit for the transaction.
- Conduct online searches on sites like Zillow and Redfin; use search terms like “Assumption.” “assume”. “Take over payments” and “owner financing.”
- Talk to the original borrower/homeowner and negotiate assumable mortgages.
Assumable Mortgages – Potential Drawbacks and Risks.
If the deal is too good, there’s likely a reason for it. These deals are hard to find. Not every deal is honest and forthright. When in doubt, hire a real estate attorney.
Legal and contractual aspects – Have a real estate attorney draw up an ironclad mortgage contract. Learn the FAQs about loan options and the ins and outs of loan availability before assuming a seller’s mortgage.
In a low-interest economy, loan assumptions are often not worth the risk and effort.
The loan assumption process is complicated. When it comes to the practice of assumable mortgages, underwriting decides whether or not a new homebuyer is eligible. Since they check credit scores and debt-to-income ratio (DTI), they often require the new buyer to buy the original borrower out of the loan. Making the effort of loan assumption is just as arduous as financing a home independently with a mortgage lender.
Today, real estate prices are soaring compared to prices in the past few years. When a homeowner considers the time and energy spent paying down their original mortgage, in conjunction with the benefit of their original purchase price, finding the same value in the current market is rare.
Need More Info: Talk to a Lender about Assumable Mortgages.
Mortgage lenders and real estate professionals leverage financing options to benefit clients and optimize their buying power. The key to assumable mortgages is determining home equity accumulation and the property value in their current market. Often, homeowners have many alternatives to assumable mortgages, such as appraising the property to determine the actual value of their home. Additionally, home equity isn’t easy to self-determine, and buyers are frequently pleasantly surprised by the appraisal and a realtor’s projected home sale price. These numbers regularly come in much higher than anticipated, and staked equity opens up a world of lending opportunities.
Undoubtedly, the benefit of retaining homeownership far outweighs the respect of allowing a new homebuyer to assume an original loan. Sometimes, a second mortgage may be the key to home retention and improved quality of life. It is often a better idea for the original homeowner to refinance their property, even if it brings a slightly higher interest rate than to allow someone to assume their mortgage. Refinancing unlocks equity funds for renovation. Calculated renovations regularly result in higher appraised value and boost equity.
For buyers, lower interest rates are only one piece of the puzzle. Homebuyers considering assumable mortgages should ask a mortgage lender if the risk involved in these types of mortgages is worth the reward and for alternative options to purchase real estate even if the interest rates are still high. Professional lenders understand the volatility in purchasing a high-interest loan, so why not connect and get the ball rolling in the best direction possible?
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your lending needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the mortgage application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
