Assumable mortgages allow a new buyer to take over the remaining balance of the seller’s mortgage under the same terms in which the loan originated. These loans garner greater attention in high interest rate environments as aspiring buyers’ scrub through the internet and social media looking for ways to increase home ownership affordability. If you are one of these knowledge seekers looking into an assumable loan, here’s what you need to know…
You’ll need the seller’s cooperation. Your seller must complete and submit all the necessary paperwork to his or her current lender to complete the assignment process. This process can only be completed through the lender’s servicing department, not through its loan officers. The mortgage servicer will review the assumption application to ensure that the potential buyer qualifies to assume the remaining mortgage balance. Loans originated through FHA, VA and USDA, are generally assumable.
You’ll need significantly more cash. You’ll only be able to assume the remaining balance of the seller’s mortgage. While the mortgage may carry significantly better terms than those available in the present market, these balances cannot be adjusted to meet your desired downpayment. For example, If the seller is asking for $650,000 as a sale price and she has an existing balance of $300,000. You will need to come up with the remaining $350,000 in cash. The larger the difference between the sale price and the seller’s existing balance, the more cash you’ll have to come up with. And as for adding a second mortgage? -That’s a hard No!
It’s Not automatic. Loan assumptions require individual lender approval. Many lenders simply do not allow loan assignment of their existing loans. Further, there may be restrictions or conditions related to any loan assumptions imposed by those who do. So, some research will be required up front.
Your Seller becomes your loan processor. Assumption applications can only be submitted by the seller. (It’s their loan after all). Applications typically include personal and financial information about you, the potential assumptor of the loan. You’ll need to provide the seller with your income verification, credit history, and other financial details to be included in the packet, so essentially your seller becomes your loan processor.
It takes substantially more time. Loan assumptions are a 2-tiered process requiring lender approval and a direct sign-off from the FHA, VA, or USDA. The lender will have to submit the approved assumption application for endorsement from these agencies before the papers can be finalized. This process is purely administrative and will not consider contract deadlines.
The best-case scenario for purchasing a home using an assumed mortgage is in a family sale where there is no open market competition from other buyers, no time pressures on the transaction such as a seller contract on a new home, and a manageable cash difference between the purchase price and the seller’s existing loan balance. If this is not your situation, then exploring the multitude of financing alternatives with your loan officer is your best option.