You could be wondering, what is an assumable mortgage loan? Essentially, it lets you take over an owner’s loan on a property. All the terms of the original loan, including the rate, remain the same. So if you’re buying a home and the seller has a favorable loan, it may be in your best interest to assume that loan instead of getting a brand new mortgage.
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The Benefits of an Assumable Mortgage
Anyone who wants to know how to assume a mortgage will need to meet with your seller’s lender. After going through an application process, you can take over the loan once you’ve been approved for it.
As interest rates rise, it is likely that assumptions will begin to play a larger role in the mortgage market. If the best rate you could get on a new loan was 4.75% but the seller had a loan at 4.0%, it would make sense to look into an assumption. An assumable mortgage loan could also be a good option if you’re going through a divorce and want your spouse to take your home.
Fees for assumptions are less than those for new mortgage loans. The fee for an FHA assumable mortgage is capped at $500. For VA it is $300.
The assumption fee doesn’t include the incidental costs the lender incurs during the transaction, such as a title search. These costs also have to be paid at closing. An appraisal typically isn’t required.
How Your Loan Can Affect Your Credit
In and of itself, assuming a mortgage will not affect your credit rating more or less than getting a new mortgage loan will. That said, there are some potential pitfalls to be aware of when looking through assumable mortgage listings for homes for sale.
Often, the seller in an assumption transaction has a distressed loan. They might owe more than the home is worth, in which case you will immediately be underwater after buying the real estate and assuming the mortgage. It would be in your best interest to order an appraisal, even if the lender does not require one.
Another problem may be that the seller has fallen several months behind on the mortgage payments. The lender should require that the loan be brought current prior to closing. If that doesn’t happen, you could end up with a delinquent mortgage before you even make your first payment.
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A distressed mortgage will not necessarily hurt your credit, but you would be placing yourself in a situation where keeping up on your payments – and thus maintaining good credit – could be a challenge.
Once the loan is transferred, you are responsible for the loan from that point forward. Any poor payment history by the previous note holder does not go on your record. But in some cases, your mistakes could affect your seller’s credit.
Assumability and the Danger of Private Transactions
Even if a loan is in good standing, it might not be assumable. Government loans (FHA and VA) are assumable as long as the new homeowner qualifies. For the most part, conventional loans usually aren’t assumable at all.
Sometimes a seller who’s desperate to sell his home and a buyer who really wants the house will enter into an ill-advised private transaction. They draw up a private note, with the buyer agreeing to pay the mortgage to the bank from that point forward. But the paperwork with the lender could remain in the original owner’s name.
The lender may not even know that this is taking place. The deed and mortgage with the original owner remains in full force. This is incredibly risky for both the buyer and seller. Both parties must trust the other because both risk having their future borrowing power and credit scores compromised.
The Bottom Line
As a buyer, it’s a good idea to tread carefully when going into an assumption. It can be a great deal if it’s done correctly and you don’t take shortcuts.
If the lender seems to be making things difficult, it might be for a good reason. The seller might be behind on their payments or the loan may not be assumable. Dig a little deeper to determine if the transaction is really in your best interest. Sometimes it’s best to get a brand new mortgage.
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