If you’re considering purchasing a home, an assumable mortgage might be a good option for you. This option allows you to take over the existing mortgage balance, rate and other terms without getting a new loan.
This type of mortgage can be advantageous for both buyers and sellers. However, you should be aware of some common concerns.
What is an Assumable Mortgage?
An Assumable Mortgage is a type of loan that allows buyers to take over a seller’s existing home mortgage without applying for a new loan. This means that the buyer gets to keep the seller’s interest rate, repayment period and other terms, but they become responsible for paying off the loan.
Unlike traditional mortgages, there are no appraisals required in this type of financing, which could save buyers hundreds of dollars on a new home purchase. Assumable mortgages are also a great option for those who want to avoid the paperwork and long application process associated with conventional loans, which can add significant time to a home purchase.
Assumable mortgages can be especially beneficial for those buying a home in a difficult market, as they can reduce the likelihood of foreclosure. This is especially helpful if the mortgage holder has a significant amount of debt that hasn’t been paid off, says John Wooley, vice president at Rocket Mortgage(r).
A buyer who wants to take advantage of an assumable mortgage will need to find a lender who offers this kind of loan. Generally, this kind of loan is available only for FHA and VA mortgages, as well as some non-conforming conventional loans from Fannie Mae or Freddie Mac.
When a lender agrees to allow a loan to be assumed, it reviews the potential borrower’s credit score, income and debt-to-income ratio. It then determines whether the buyer can make payments on the new loan and stay current with the original loan.
In some cases, lenders might not release the seller from liability for any missed payments. This can lead to a negative impact on the homeowner’s credit rating, which can be devastating for the seller.
Assuming a mortgage can be a great way for sellers to get the most out of their home and to avoid foreclosure, but it’s not right for everyone. Some people are more comfortable with the process than others, and if you’re not sure if this kind of financing is right for you, it’s best to consult a professional before making a decision.
How Does an Assumable Mortgage Work?
An assumable mortgage is a type of mortgage financing that allows buyers to take over the existing loan balance, interest rate and payments of a current seller. This option is not available to all homebuyers, but can be beneficial for those who qualify.
Assumable mortgages can be a great way for homebuyers to access low rates, particularly in markets where interest rates are rising rapidly. However, they are only useful to those who have a stable income and good credit history.
The best way to find out if an assumable mortgage is right for you is to speak with your lender and ask all the necessary questions. They’ll help you determine if an assumable mortgage is right, or if you should consider a different option.
There are several advantages to assumable mortgages, including lower closing costs and a higher sale price. The most important advantage is the lower interest rate that is possible with an assumable mortgage.
Another advantage is that the buyer’s mortgage balance is likely to be lower than the home’s sale price. This allows the buyer to secure a better interest rate than they would on their own, which can save them money in the long run.
A third advantage is that borrowers who purchase a property with an assumable mortgage are protected from any liability after the sale. This is a legal gray area that can be complicated, but it’s an attractive feature for many buyers and sellers.
Some sellers worry that a buyer with an assumable mortgage will default on the loan and force the seller to pay for part or all of it. While this is not a risk for the seller, it can create headaches for the buyer and can lead to a lengthy negotiation process.
It’s also important to understand the potential safety concerns that can arise with an assumable mortgage in British Columbia. For example, a buyer might assume a mortgage on a home that has been stigmatized in the past. This could affect the value of the home and make it more difficult to sell.
Fees Charged by Lenders
An assumable mortgage is a home loan that allows a new buyer to assume the current loan terms, including interest rate and monthly payments. Assuming a mortgage can help buyers in a difficult market, especially when mortgage rates are high. But it also has its limitations.
Assumable mortgages are generally only available on FHA and VA loans. These are backed by the federal government and offer lower down payments than conventional mortgages, which can make them more attractive to borrowers.
A lender will typically charge a fee to update mortgage records when a buyer assumes an existing loan from the seller. This fee is typically capped at $900. In addition, lenders can ask for a $500 underwriting fee.
However, many experts argue that the fee should be higher. For example, a June 2022 letter to the servicers of Fannie Mae and Freddie Mac by nonbank trade group Community Home Lending Association called for an increase in fees.
Some mortgage professionals believe that if the servicers of these government-backed loans are allowed to charge a higher fee, they may be able to make money on them. The fee should cover the costs of processing, underwriting and closing a transaction that includes a mortgage assumption, experts say.
Other lenders, meanwhile, have a hard time getting their hands on these deals. For one, they’re not familiar with the product.
In addition, they often don’t have the infrastructure in place to handle them. According to David Sheeler, president of residential servicing and executive vice president of correspondent lending at Freedom Mortgage, runoffs, a term used to describe borrowers who pay off their existing mortgages in preparation for refinancing or buying a home with another lender, are a problem that affects 5% to 8% of lenders’ and servicers’ portfolios annually.
To mitigate this issue, Sheeler says, lenders and servicers have to rewrite their processes to ensure they don’t miss runoffs. It’s also important to change the way they handle piggyback loans, where a mortgage carries both primary and secondary ownership.
In addition, mortgage professionals need to educate their clients about the advantages and risks of taking out an assumable loan. This will help them determine whether it’s the best option for them.
An assumable mortgage can save homebuyers a bundle, but it comes with its own set of safety concerns. Typically, an assumable mortgage involves porting the current loan rate, repayment period and principal balance of an existing loan from one borrower to another without creating a new loan in the process. As a result, lenders must scour the borrower’s records for the smallest print. This can be a challenge when it comes to mortgages owed to multiple creditors, whose rates and terms vary.
The safest way to navigate this tricky minefield is to work with a trusted financial professional like an experienced real estate agent. They will be able to guide you through the mortgage maze and help make sure you don’t pay too much for your next home.
Aside from the aforementioned safety concerns, a well-executed assumable mortgage should have the same effects on your credit score as a standard loan. This means you’ll have a better chance of getting a great deal on a new home in the future. Assumable mortgages are an excellent opportunity for first-time homebuyers to get into the market, as they require far less cash than a traditional home purchase.
By using a lender like Vancouver Home Loans, you can find the right mortgage to fit your budget and lifestyle. We’ll be here to help you every step of the way.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.