Posted on March 1st, 2023.

Assumable Mortgage. Types and how it works.

Assumable loans refer to mortgages that can be transferred from the current borrower to a new borrower, who takes over the remaining loan balance, interest rate, and terms. The new borrower becomes responsible for making the mortgage payments and complying with the terms of the original loan agreement.

There are two types of assumable loans:

1. Qualified assumable loans: These are loans that require the new borrower to qualify for the loan based on their creditworthiness, income, and other financial factors. The lender must approve the transfer of the loan to the new borrower, and the new borrower must meet the lender's underwriting criteria.

• FHA (Federal Housing Administration) and VA (Veterans Affairs) loans are government-backed and can be assumed by any qualified borrower. The new borrower must meet the lender's credit and income requirements, and the loan must be current and in good standing.

2. Non-qualified assumable loans: These are loans that allow the new borrower to assume the mortgage without qualifying for it. These loans are less common and are typically found in situations where the original borrower is a family member or a close friend.

When assuming a loan, the new borrower takes over the remaining balance of the original loan and continues to make the monthly payments. The new borrower does not receive any funds from the lender, and the lender may charge a fee for the assumption. The terms and conditions of the original loan, such as the interest rate, repayment period, and prepayment penalties, remain the same.

The process of assuming a loan can vary depending on the type of loan and the lender's policies. Generally, the buyer will need to apply for assumption approval with the lender and provide financial documentation to demonstrate their ability to repay the loan. If approved, the lender will modify the loan documents to reflect the new borrower's information and the buyer will assume responsibility for making the remaining payments.

However, not all loans are assumable, and even those that are may have restrictions and limitations. For example, the lender may require a down payment or impose other qualifying criteria for the buyer. Additionally, assuming a loan does not necessarily release the seller from their obligation to repay the loan if the buyer defaults, so the seller may still be held responsible for any remaining balance on the loan.

Assumable loans can have some advantages for both the buyer and seller. For the buyer, assuming an existing loan can be less expensive than obtaining a new mortgage, as there may be fewer closing costs and lower interest rates. For the seller, an assumable loan can make their property more attractive to buyers and potentially lead to a quicker sale.

I have listed some of the advantages and disadvantages of the assumable mortgage:

1. Advantages of Assumable Mortgage:

• Increase the desire for your home: The homes owned by sellers with little equity and existing mortgage with a low rate appeal to the buyers more.
• No need for an appraisal: There will be no need for an appraisal in mortgage assumption which ultimately makes it easier to crack the deal. It saves the appraisal fee for the buyer which would be many hundred dollars. Buyers can still go for the appraisal independently to reduce the risk of overpaying for the property.
  

2. Disadvantages of Assumable Mortgage:

• Limited to the current lender: Even if you are assuming a mortgage loan, you have to apply for it and meet the requirements of lenders since it is a newly originated loan. You cannot assume it without the consent of the lender. This restricts your option to find a lender of your choice.
• Chances for large down payments: In cases of sellers with ample equity, the buyer could have to make large down payments.
• The original buyers could still be responsible for the debts: If the buyer does not pay off the debts, the seller’s credit would certainly be affected. Moreover, if the buyer defaults and is not released from liability, the original borrower will have to suffer the damage of his or her poor credit rating.
  

It's important to thoroughly review the terms and conditions of an assumable loan and consult with a financial professional before proceeding with the assumption process.

Assuming a loan can be a good option for a borrower who wants to avoid the time and expense of obtaining a new mortgage and the new borrower must carefully review the terms of the original loan and ensure that they are comfortable with the payments and other obligations before agreeing to assume the loan.