Most homebuyers follow the traditional path of choosing a lender and applying for a mortgage. With so many lenders and types of mortgages to choose from, all of which provide specific benefits depending on your needs as a borrower, choosing the right type of loan can be tough.

With today’s interest rates being higher than in previous recent years, it may be worthwhile to look outside conventional financing and consider an assumable mortgage.

What is an Assumable Mortgage?

An assumable mortgage allows the buyer to purchase a home by taking over, or “assuming”, the seller’s mortgage loan. The buyer assumes the interest rate, repayment period, current principal balance and other terms of the seller’s existing mortgage, rather than obtaining a brand-new loan.

What Type of Mortgages are Assumable?

Not all home loans are assumable. For the most part, conventional mortgages are not assumable. However, loans that are backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA) are assumable, as long as specific requirements are satisfied.

FHA Loans

FHA loans require that both the buyer and the seller must meet specific criteria for an assumable mortgage. Sellers must live in the home as a primary residence for a set amount of time. Buyers must first verify that the loan is assumable, and then go through the standard application process for an FHA loan. FHA loans are considered more accessible to buyers with a less-than-perfect credit history. However, your credit score must be above 580 with a debt-to-income ratio of 43% or less.

VA Loans

A VA loan is available to eligible military members, service members and their spouses. But a buyer who is not a qualified current or former military service member can apply for a VA loan assumption. Depending on how the loan was set up, a lender may need to have the loan also approved by the Regional VA Loan Center, which could take additional time to process.

USDA Loans

These are loans for properties in more rural locations. Typically you’ll need approval from both the lender and the USDA. For these loans you’ll need a minimum credit score of 620.

Pros of an Assumable Mortgage

  • The first and foremost advantage of an assumable mortgage is the potential for a lower interest rate. For example, if the seller took out the loan at a 3% interest rate and the buyer can assume that mortgage rather than take out a new loan at a much higher interest rate, the buyer can save thousands of dollars on their mortgage payments.
  • Mortgage assumptions typically don’t require an appraisal, which also saves the buyer money. In addition closing costs for a loan assumption are typically much lower than with a conventional closing.
  • There’s no need to spend time shopping for a lender and comparing rates, etc. 
  • For the seller, an assumable mortgage may make the home easier to sell. Buyers looking for a simplified home buying process and a potentially lower interest rate could find the home more attractive.

Cons of an Assumable Mortgage

  • No opportunity to shop around. The buyer is tied to the seller’s existing lender with all the original terms and conditions. This restricts the ability to search for more competitive rates and terms.
  • As the buyer, you may need to come up with a lot of cash. If the value of the home is higher than the remainder of the existing mortgage, you’ll need to come up with a hefty down payment. For example, if the purchase price of the home is $400,000 but the mortgage balance is $250,000 that means that the seller has built up equity in the amount of $150,000, which you’ll be responsible for. You’ll either need to come up with the cash or find a lender willing to issue you a second mortgage for that amount. 
  • For sellers, there is a risk that the buyer defaults on the mortgage. If this happens they run the risk of being responsible for the debt and having significant damage to their credit. It’s important for the seller to verify that a release of liability will be given and to obtain the release of liability from the lender so they are protected. 

This is especially important if the mortgage is a VA loan. The seller has the potential to lose their entitlement altogether if the new owner defaults, affecting their eligibility for future VA loans. To prevent this from happening, sellers need to confirm with their lender that a release of liability will be provided and take the necessary steps to obtain a release of liability from the lender after closing and provide proof to the Department of Veterans affairs to reinstate their entitlement. 

The Bottom Line

Mortgage assumption can be a valuable option for buyers who are looking for a lower interest rate and a simpler home buying process. The buyer must weigh the pros and cons carefully and if the benefits outweigh the risks, an assumable mortgage might be the best option for home ownership.

Contact the Donnelly Group

If you are considering buying a home in metro Phoenix, the Donnelly Group has the local experience and expertise to help. We also have trusted mortgage loan partners that we can connect you with for more advice on assumable mortgages. Please don’t hesitate to contact our team at 480-792-9700 or by email, we’d love to help.