How to Get an Assumable Mortgage?
It will be nice to purchase a house or any other piece of real estate via a cash. Yet most of the time when acquiring a house you need a form of financing. Typically as a potential buyer, you go to a bank and take out a mortgage for the real estate you want to acquire. In our case, a house. As an alternative to this traditional road, you can take an assumable mortgage. Meaning you take over the existing mortgage of the seller under the condition that the lender approves you.
In some cases you, the buyer will save a significant amount of money when assuming the mortgage. This happens when interest rates have increased from the moment when the original mortgage was issued for the seller and you can take over this lower-rate mortgage.
It might also happen that the purchase price of your dream house asked by the seller to be higher than the assumable mortgage. In this case, you have to choices a down payment or additional financing for the uncovered amount.
Why Assume a Mortgage
To better understand the implications let’s take into consideration the following example: if the seller has an assumable mortgage of $150,000 and his asking price is $200,000 you will need $50,000 to acquire the property. If you don’t have this 50,000 as a down payment, even if you assume the mortgage from the seller the terms of you loan imposed by the lender can change depending on your credit risk, market conditions and not only.
Another particularity of the assumable mortgage is the fact that the seller can still be liable for the loan if the buyer is in default, triggering the sellers responsibility to cover the money that the lender was not able to recover from the buyer. This risk can be mitigated for the sellers by releasing their liability in writing at the time when the mortgage is assumed by the buyer.
As explained above the assumable mortgage seems to be a good deal for the buyer so why don’t we here more often of assumed mortgages. Probably the answer resides in the fact that regular loans, in the last two decades or so, are rarely assumable with some major exceptions:
- Veterans Administration Loans or VA loans, guaranteed by the government and granted to qualifying veterans and surviving spouses.
- Federal Housing Administration Loans or FHA Loans also guaranteed by the government but available to all borrowers. FHA loans are still issued by traditional lenders but the government insures the loan against default.
- USDA offers loans to the potential rural property owners by the United States Department of Agriculture.
If you are considering an assumable mortgage, make sure you follow correctly the proper steps before signing any papers.
Do you qualify for assuming the mortgage
As mentioned before some government-backed loans are easier to assume than conventional loans. If you meet the qualification requirements of the government agency you have made the first step towards assuming the mortgage.
Conventional loans are most of the time un-assumable. However, if the current owner is behind in payments, the lender may be willing make the mortgage assumable. Consult with a real estate professional or your lawyer. Discuss with the lender to make sure you qualify to assume the mortgage.
Decide if you will go for a regular mortgage or an assumed one
- In case of a divorce or if you inherit a house assuming the mortgage might be a good idea.
- Take into consideration the evolution of the real estate market. If the interest rates have increased over time assumption make sense.
- If you are in a hurry, an assumption is also an option for the approval process takes only 30 days
Calculate all the costs involved
- Do you need a down payment for the real estate prices had increased in the area?
- Find out what are the assumption fees
- Check if you will get the same mortgage conditions as the seller or your assumed mortgage will have changed terms.
Make sure you can get the extra funds if you need the down payment
- Approach the mortgage assumption in the same way as the regular mortgage
- Find the right lender for you that will fund the down payment
Assuming the mortgage
- Request the assumption package from the seller’s lender. He should tell you who this is.
- Submit proof of your creditworthiness.
- Fill in the application package for assuming the mortgage as well as the authorization to release information.
- After you submit the application your credit scores will be calculated.
You will also receive forms required by the Real Estate Settlement Procedures Act. Fill them out and send them to the lender
- Sign the mortgage assumption agreement.
- The agreement is signed usually between seller and buyer. However, depending on the type of loan the seller had, the bank or a government agency will also sign it.
- Sign the release of liability form for the seller. This cures making them liable in case you can no longer make the mortgage payments.
- Attend the closing
- You should attend the closing if you get a regular mortgage or an assumed one. Good news! The closing costs will be significantly less than for a regular mortgage.