Assumable Home Loan

How Assumable Home Loans Work

With an assumable home loan, existing homeowners transfer mortgage obligations to a qualified purchaser. Mortgage note assumptions were popular in the 1970s and 1980s and occurred without the lender's permission being required. Today, only VA and FHA loans are assumable without lender permission.

A buyer may not be able to find a lower rate for a new mortgage, either because of current market conditions or due to the buyer’s poor credit history. Market rates fluctuate, and when the current market rate is higher, the lure of lower interest rates often drives buyers to search for an assumable home loan. When a home buyer takes on an assumable home loan, they become responsible for the home seller’s existing mortgage. This means that the buyer assumes the mortgage obligations to include the established rate just as if the original loan had been issued to them.

Benefit of Assumptions to Buyers

When market rates are on the climb, lower interest rates on an assumed mortgage may provide the best rate a buyer can get. However, in times when mortgage rates are low, prospects for assumable home loans generate less interest. Benefits of assuming a mortgage need to be thought out and measured. Ask questions like:

• What is the difference between assuming the mortgage or obtaining a new loan?
• What is the balance and period remaining on the existing loan versus the term of the new loan? (Buyers should not expect to receive full value of an assumption)
• How long do you expect to have the home? With that in mind, what is the rate you can earn on savings from the lower rate?

One additional benefit to take into the decision making process is that when you assume a home loan, you’ll avoid some settlement costs that you would have to pay on a new mortgage.

Benefits of Assumptions to Sellers

In the case of an assumable home loan transaction, the seller will also want to benefit when they offer the buyer an opportunity to assume the loan. As a mutually beneficial agreement, both parties share the savings. If the purchase price for the home exceeds the mortgage balance, the buyer will need to make a sizeable down payment or secure a separate mortgage to make up the difference. The main benefit for the seller offering an assumable home loan is a higher price for their house.

Cost of Assumptions to the Lender

The benefits enjoyed by both the buyers and sellers when an existing loan is assumed come at the expense of the lender. Instead of having the existing, lower-rate loan repaid, which would then allow the lender to convert the mortgage into a new loan at the current rate, the assumable home loan stays on the books at the original, lower rate.

VA and FHA Loans

VA loans which closed before March 1, 1988 and FHA loans which closed before December 14, 1989 are assumable by anyone. Enough years have passed that not many of these older loans are still out there, but buyers who do assume these mortgages don’t have requirements to meet. However, unless the seller receives a release of liability, the seller maintains responsibility for the mortgage if the buyer defaults. If a VA or FHA assumable home loan attracts a buyer, the seller can protect themselves by asking that the agency underwrite the buyer. By doing so, the seller is released from liability.

Current regulations require approval of the buyer by the agencies with the assumption of more recent VA and FHA loans. Once the buyer is approved and the property sells, the seller is relieved of liability. Small assumption fees usually apply.

Do the Math

Today many assumable loans are adjustable rate mortgages. Don’t presume an assumable home loan is your best mortgage option until you do the math and calculate the financial benefits of assuming an existing loan versus applying for a new mortgage. Check out assumption fees and have a professional read over the existing contract for any other conditions of assumption that will apply.