4 minute read
Cora Carleson.........................4
Hey Cora, I have heard a lot about “assumable” mortgages. What is that exactly? Signed, Financially Curious.
Dear Financially, well that is a good question my friend. An Assumable Mortgage by definition (according to Google) allows someone to find a house they want to buy and take over the seller’s existing home loan without applying for a new mortgage. This means the remaining balance, mortgage rate, repayment period and other loan terms stay the same, but the responsibility for the debt is transferred to the buyer. Assumable mortgages become popular when interest rates rise, because a buyer can assume the mortgage at a lower rate. Here are 10 “fun filled” things about assumable mortgages that you need to know. 1. Not every mortgage is assumable. 2. A buyer still must be qualified to purchase the house, that means good credit, financially stable, income, etc. 3. FHA, VA, and USDA loans can be assumable. Conventional loans cannot. 4. Down payments on these loans are high. 5. A buyer assumes the interest rate and terms of the loan from the seller. 6. A buyer assumes the length of the loan as well. If the loan is in it’s 5th year of a 30 year mortgage, the buyer would assume only the 25 years remaining. 7. A buyer probably will not need an appraisal 8. The closing costs for buyers is relatively low as FHA, VA and USDA loans impose limits on closing costs when a mortgage is assumed. 9. Buyers can save on interest because buyers are borrowing less over a shorter time than a new mortgage. 10. With today’s rates hovering around 5.5%, assuming a 25-year mortgage at 3% is very attractive.
An assumable mortgage seems relatively simple: A buyer takes over an existing mortgage from a seller and the original terms, interest rate and loan amount stay the same. Essentially, the seller is handing you their mortgage with their house! The payments remain the same until you finish paying the home off and making it just yours. Assumable mortgages are not an alternative to someone with poor credit scores. A buyer still must qualify for the loan and go through the same qualification process. Bummer.
So, what is the advantage? The interest rate and the length of time left on the mortgage. Right now, rates are running around 5.5 % and higher. If you qualify for a home for $350,000 you would qualify for an assumable loan as well, but you would “inherit” the lower rate that the seller has on their loan. Also, if the seller purchased their home say 7 years ago, that takes 7 years off a 30-year mortgage and you would only have 23 years left before that home is paid off. And let me tell you, at my age, time goes so quickly that 23 years will fly by!
Now, let’s not forget that you still have to qualify to take over this loan just like you would need to do if you were to purchase any other home. The only difference is that you don’t get a choice of mortgage lender or bank. You have to use the same lender that currently has the loan. You will have to provide income and employment information, previous 2 years of tax return, recent paystubs, recent bank statements. Proof of other assets, like retirement and/or investment accounts. The mortgage underwriter will also pull your credit report and score to make sure you meet the credit requirements for the loan that’s being assumed. Yes, they want to know everything!
What’s the downside? Well, large down payment most likely. With an assumable mortgage, you have to pay the difference between what the sellers are listing their property for and what their current balance is on the mortgage. WARNING – MATH right here and now! Let’s say the seller is listing his house for $450,000 and he currently has a loan balance of $320,000. This means that the buyer must come to the closing table with $130,000 plus their closing costs. That can be quite a chunk of change. But you could be gaining a mortgage at 2.6% interest!
If you currently have your home for sale, call your lender and find out if your home is assumable. Once you find that out, let your realtor know and they can market accordingly. Remember, if your loan is a conventional loan, you would not have an assumable loan.
If you are currently house hunting; look into this route of assuming someone else’s mortgage and see if it will work for you. If you have cash to work with, this can be a great option for you. If you don’t have a lot of cash, it can still work. If the seller does not have a lot of equity in their home, the down payment or difference between price and balance is less and therefore less cash for you to come up with. So don’t rule this out.
There you have it; assumable mortgages can be a very good thing and you should take advantage of them. They are a bit trickier so make sure your friendly realtor is helping you.
Oh, one more thing, here is a link to a short video on how these work – it’s very straightforward and to the point, with lots of colorful graphics and a nice man that explains it all. https://www.investopedia. Oh, I lied, one more thing, if you are thinking about buying or selling property, please call me, I would love to represent you!
