Understanding assumable mortgages
Perhaps you have already come across the term “assumable mortgage” and wondered what it means. In fact, an assumable mortgage is rather straightforward: it is a mortgage that can be transferred from the existing owner of a property to the buyer. This borrowing method has advantages and disadvantages—here is a quick summary of them.
The assumable mortgage explained
As already mentioned, an assumable mortgage can be transferred directly from the owner/seller to the buyer, allowing the buyer to forego applying for a new loan. There is still a similar approval process to go through: the new borrower must apply for the assumable mortgage and satisfy the lender’s requirements, including for income level and creditworthiness. But in this case, the terms and interest rates remain unchanged from those applied to the original borrower; the new borrower simply takes over responsibility for the monthly repayments and overall debt. By contrast, conventional mortgages—i.e., those that aren’t assumable—include a “due on sale” clause stipulating that the outstanding debt must be fully repaid once the property is sold. Typically, property listings will specify which homes are tied to an assumable mortgage, but it is also worthwhile stating your preference to real estate agents.
Advantages and disadvantages of an assumable mortgage
The first advantage of an assumable mortgage is that the process is simpler: in essence, your name is attached to a pre-existing mortgage upon completion of the purchase. Plus, if you have a bad credit history or are an otherwise less desirable mortgage applicant, then these factors are less likely to count against your application, and they will not affect the interest rate. So not only do you have a better chance of a successful purchase, but you will also save a significant amount of money over the lifetime of the mortgage. Sellers, too, will enjoy the benefit of being able to attract a wider pool of buyers.
On the other hand, since the seller will have already paid off part of the mortgage—possibly a good deal of it, if they have owned the property for a while—an assumable mortgage will always fall short of the value of the property, and the property may have also appreciated in value since it was originally purchased. Hopefully, this shortfall isn’t much more than what you would have had to pay anyway, as a down payment. But in any event, you’ll need access to a certain amount of cash, and possibly need to take out a second loan.
The approval process
Some buyers may be eligible for an assumable mortgage backed by an FHA (Federal Housing Administration) or VA (Veterans Affairs) guarantee. However, these are not available to everyone, and in any case, it should be remembered that although the application process for an assumable mortgage is generally less strict, a degree of creditworthiness and reliable income must still be established. These requirements differ across loan providers, as well as across types of loans. It is important to discuss the pros and cons of taking on an assumable mortgage with your family first. Also, an assumable mortgage may not be cheaper than what’s on offer in the current market, so it is important to check whether you might be better off taking out a new loan.