Assumable Mortgage

Definition: An assumable mortgage is a legal instrument that, when properly executed, transfers the title to the property subject to the mortgage from the seller to the buyer upon payment of all amounts due under the mortgage contract. It relieves the seller from liability for unpaid debt and allows cash to be paid for the property at any time after the transaction. The assumable mortgage is typically used by first-time homebuyers or borrowers that have exhausted all other available avenues for relief from debt.

Assumable mortgages are mortgages where the lender agrees to assume the seller’s debts in case the buyer cannot or does not make their down payment. The assumable mortgage is designed to help the buyer acquire the home more quickly and avoid loan delays, scarcities, and other financial headaches when trying to sell a home. On the other hand, the seller’s loan is secured by a lien on the property until the balance is paid off.

Types of Assumable Mortgage

Types of Assumable Mortgage include Federal Housing Administration (FHA) or a Veteran’s Administration (VA) or USDA.

FHA

FHA mortgages are assumable when both parties meet the requirements for the assumption. The lender has to provide acceptable documentation to the borrower, including income proof, property ownership, payment documents for previous property banking, and documentation from previous property purchases indicating income and expenses. The FHA does not require income verification for FHA-backed loans, but many lenders still check income information when deciding if a borrower can properly service an assumable mortgage loan.

VA

A VA mortgage is available to active-duty members, veterans, their immediate families, and certain former civilian employees (including retirees) of the Federal government, including those on active duty, which are assigned to a unit or facility of the VA or any of its successor organizations. The interest rates for VA mortgages are low and adjustable, with additional benefits available upon original purchase or refinance completion.

USDA

Homeowners who finance with USDA loans will pay less interest over the life of the loan. Using this financing method, you will avoid paying more in interest on your existing loan balance than if you refinance or buy directly from the lender. The interest rate on a USDA loan does not increase during the life of the loan, unlike a conventional loan or credit card.

The advantages of assumable mortgage loans include lower interest rates and fees than conventional mortgages and the ability to refinance at any time. The downside is that if the housing market tanks or if you cannot sell your home quickly, your new lender may demand more money than you are willing to give them.

Advantages of Assumable Mortgage

  • You may be able to obtain a lower rate for a property than what is available on the open market. This is especially true if you have a good credit score and begin paying down your outstanding debt over time. 
  • The advantage of assumable mortgages is that the seller will pay your mortgage balance after selling the property. 
  • An assumable mortgage is best when you are buying a first home for your family or when you are refinancing a mortgage that you may no longer use.

Disadvantages of Assumable Mortgage

  • The seller may not have sufficient funds to cover potential losses if the borrower fails to make their mortgage payment. 
  • Most buyers find that having a second mortgage on their property makes them more comfortable handling financial risk; however, there is also a risk that the second mortgage could be purchased by a third party who intends to foreclose on the property in the future (and in some states, even if you agreed to purchase the property with an assumable loan at the time).

Assumable are mortgages subject to many conditions, which means that you are legally responsible for paying off the loan if something happens to your home. Lenders of assumable mortgages must assess your financial state and current financial standing. They will also consider whether you can afford to pay off the loan in full at any point during its term and, if not, how much you are likely to be able to pay it off over time.