With so many financing options, there are many ways to buy real estate without a conventional mortgage. Each option has benefits and disadvantages, so it’s up to the buyer to choose what’s best for them. One financing method that’s worth looking at is an assumable mortgage. So, to learn more about assumable mortgages and how they work, just keep reading.
Contents of This Article:
- What Is an Assumable Mortgage?
- What Types of Mortgages are Assumable?
- How Does an Assumage Mortgage Work?
- Pros and Cons of Assumable Mortgages
- Find Management for Your Rental Properties
What Is an Assumable Mortgage?
An assumable mortgage allows a home buyer to purchase real estate by taking over the seller’s mortgage loan. Many buyers find this financing option appealing since they don’t need a new mortgage loan to buy a property. Instead, they take over the remaining balance, repayment schedule, and rate of the previous owner’s loan.
For instance, if a buyer assumes a 30-year mortgage loan that is four years old, they have 26 years to pay the rest off. When mortgage rates are high, buyers can assume old mortgages with lower interest rates, saving them thousands of dollars.
However, not all mortgages are assumable. Before we go over which types of mortgages are assumable, here’s how you can find one while looking for properties.
How to Find an Assumable Mortgage
If you’re looking to buy a property with an assumable mortgage, you can filter your search to find them. For instance, while looking for properties for sale online, you can specifically search for properties that offer assumable mortgages. Additionally, you could look for foreclosure listings and ask the owners if they’re willing to sell the home with an assumable mortgage.
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What Types of Mortgages are Assumable?
Not all mortgage loans are assumable. For instance, most conventional loans are not assumable since most contracts have a due-on-sale clause. This clause allows the lender to require that the loan be paid back in full once the property sells.
However, home buyers can assume most federally guaranteed or insured mortgages. Here are a few examples of assumable mortgage types.
- FHA Loans
- VA Loans
- USDA Loans
Federal Housing Administration (FHA) Loans are generally assumable as long as they meet the requirements. For instance, newer FHA loans require that both the seller and buyer meet specific criteria. For example, sellers must live in the property as their primary residence for a certain amount of time. Additionally, buyers must go through the standard procedures to obtain an FHA loan.
First-time home buyers can benefit from FHA loans since they require smaller down payments and lower credit score requirements. As such, assuming an FHA loan can be an excellent option for someone with imperfect credit history.
Another type of loan that buyers can assume is a VA loan, which is backed by the Department of Veterans Affairs. VA loans are only available to eligible military members, service members, and their spouses. However, buyers that are not current or former military members can apply to assume a VA loan.
Depending on the original loan terms, the lender may need to get the loan approved by the Regional VA Loan Center. However, if the loan closed on or before March 1, 1988, it doesn’t have to be approved by anyone. With loan approval, buyers must meet the requirements and pay processing fees.
Loans backed by the U.S. Department of Agriculture are used to buy rural properties. Generally, USDA loans have lower interest rates and don’t require a down payment. However, to assume a USDA loan, buyers must meet standard loan qualifications. For instance, you’ll need to meet the credit and income requirements and get approval from the USDA to transfer the loan.
Buyers can only assume the existing loan terms and interest rate in certain instances. Generally, the same rates and terms are available for family members exchanging the title of a property. On the other hand, most USDA loans transfer the mortgage debt to the new buyer but adjust it with new rates and terms.
How Does an Assumable Mortgage Work?
Assumable mortgages work similarly to any type of loan. However, you must get approval from the lender to assume a mortgage loan. Unfortunately, if you assume a mortgage without informing the lender, they may request that the loan is paid in full immediately.
If borrowers assume a mortgage, they must endure some of the same processes of qualifying for a new loan. For instance, the lender might want to see the new borrower’s credit history and financial information. Once the lender approves the loan, the original borrower is no longer liable for the debt.
Sometimes, a seller might lose out on profits while selling a property with an assumable mortgage. For instance, if the buyer assumes a $250,000 mortgage on a home worth $500,000, they may need to work with the seller to pay the remaining balance.
Pros and Cons of Assumable Mortgages
Each type of mortgage loan has its pros and cons. Assumable mortgages are beneficial for a few reasons. However, it’s important to discuss the cons as well. Here are the main benefits and advantages to note about assumable mortgages.
Benefits of Assumable Mortgages
- Lower Interest Rate- When mortgage rates are high, buyers can benefit from assuming a mortgage with a lower interest rate.
- Fewer Closing Costs- Generally, closing costs on assumed mortgages are capped. So, you’ll likely pay less upfront when buying a property with an assumable mortgage.
- Less Debt- With a smaller loan amount and lower interest rate, you can take on less debt with an assumable mortgage.
Disadvantages of Assumable Mortgages
- Higher Down Payment- If the home equity is high, you could face a much larger down payment than if you purchased the property with a new mortgage.
- Credit and Income Requirements- The seller could take on major risks if you don’t meet the loan requirements. As such, most sellers won’t transfer an assumable mortgage unless you meet the lender’s income and credit requirements.
- Potential Fees- Buyers may need to pay loan assumption fees or ongoing mortgage insurance payments once they obtain the property.
Find Management for Your Rental Properties
Assumable mortgages can make it easier for investors to buy real estate. Most investors look for affordable ways to purchase properties for their rental business. However, once you obtain a new property, you have to find the best way to manage it.
If you have several properties to look after, it can quickly become a full-time job. As such, many rental investors look to professional property management to take over some of their day-to-day responsibilities.
Bay Property Management Group offers comprehensive management for landlords near Baltimore, Philadelphia, Northern Virginia, and Washington, DC. Whether you need help marketing properties, screening tenants, or collecting rent payments, we can help. Contact BMG today to learn more about our rental management services.