In an assumable mortgage, a buyer is able to take over the seller’s existing loan, essentially taking the place of the seller. The loan balance remains the same and hopefully, so does the interest rate.
Types of Assumable Loans
So, what types of loans today are assumable? Many ARM’s have an assumability option, although you will have to check with your broker or lender to find out for certain. The advantages of taking out an assumable loan is seen when you’re ready to sell your home, and a qualified buyer can avoid the closing costs of obtaining a first mortgage. Also, your mortgage may carry a rate below what the market is offering, effectively increasing the value and marketability of your home. Fixed rate conventional loans are less likely to be assumable because lenders have been burned in the past having to honor a low interest rate during a time when the market interest rates are much higher. That is when mortgages started carrying “due-on-sale” clauses.
FHA and VA Loans
The majority of loans that are assumable are FHA and VA loans. Since the late 1980’s, lenders have required that the new borrower meet the lender’s qualification requirements. Previously, FHA and VA loans had been assumable by anyone. There are three levels of assumption with different sets of liabilities and obligations. They are assignment, subject to, and novation. Look for future articles here that will examine these differences more in-depth.
Fees and Rate Adjustments
Check with the lender to find out what fees or rate adjustments are required in the mortgage assumption. Depending on the terms of assuming the mortgage, it may make more sense to take out a new loan altogether. FHA charges an assumption fee of $500 and a credit report fee. VA loans charge a $255 processing fee , a $45 funding fee and the VA itself receives a funding fee of 0.5% to 1% of the loan balance.
Cash for Difference Between Loan Balance and Sale Price
Borrowers who benefit the most from assumable mortgages are those that have the cash to pay the difference between the seller’s loan balance and the agreed upon sales price. For example, you are, purchasing a $200,000 home and have 10% to put down as a down payment. The seller’s assumable mortgage balance is only $40,000, which will require to obtain a second mortgage or other type of financing for roughly $140,000. Because second mortgage rates are almost always higher than those of first mortgages, it would probably make much more sense to take out a new 80-10 piggyback loan.
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