Understanding Assumable Mortgages
05/23/2019 Alena Savchenko
In a typical home buying scenario, the purchaser works with a lender to obtain financing for their dream home with a conventional mortgage. In certain situations another option may be better, assuming a mortgage. Assumable mortgages can save you a great deal of money during the buying process and beyond.
What Are Assumable Mortgages?
An assumable mortgage is a special type of financing that allows a buyer to “take over” the seller’s existing mortgage and all of the terms that come with it, such as interest rates, the current balance, and repayment period.
Which Types of Mortgages Are Assumable?
The loans that most often qualify for assumption are VA and FHA loans, which are backed by the federal government. Under some specific circumstances conventional mortgages may also be assumable, but the majority of those loans contain a “Due on Sale” clause requiring the full balance of the loan to be paid upon transfer of property ownership, which makes the loan ineligible for assumption.
How Do Assumable Mortgages Work?
With an assumable mortgage, you take over payments and other responsibilities on the home according to the same exact mortgage terms — including the interest rate and monthly payments — which can be significantly lower than the current rates and terms available for new mortgages.
In other words, you may save tens of thousands of dollars on an assumed mortgage since you’re effectively grandfathered in to what could be more favorable terms secured when the original loan was obtained. To illustrate these savings, let’s take a look at an example case.
Saving Money with an Assumable Mortgage
Let’s say Susan wish to assume the mortgage on a $225,000 home and the current balance is $200,000. This means Susan take over payments on the remaining $200,000 and fully enjoy the original terms allotted to the assumed mortgage. Susan will only need to secure an additional loan at a current interest rate to cover the $25,000 difference, or pay the difference in cash, similar to a traditional down payment.
Here is how these financial scenarios break down:
FHA Mortgage: A 30-year FHA loan for $225,000 with a fixed interest rate of 5% will result in monthly payments of $1,207.85 and a total cost of $434,826 over the life of the mortgage.
Assumable Mortgage: Assumption of a 30-year FHA loan 10 years in, with a remaining principal balance of $200,000 at the original interest rate of 2.3% results in a monthly payment of $769.60 and a loan cost of $277,056, paid over 20 years. A separate 30-year loan to cover the $25,000 difference (at 5%) results in a monthly payment of $134.21 and a total loan cost of $48,315.60.
|Conventional Mortgage||Assumable Mortgage |
+ additional mortgage to make up the difference
|Savings From Assumption|
200,000 + 25,000
|Interest Rate||5%||2.3% and 5%||n/a|
|Monthly Payment(s)||$1,208||$903.81 |
= 769.60 + 134.21
|Total Loan Cost||$434,826||$325,371.60 = |
*Note: Example above does not include mortgage insurance. Mortgage Insurance (MI) may change depending on the LTV, ask your loan officer for more information.
Both monthly payments, including the assumable mortgage and additional loan, will total $903.81, saving Susan $304.19 a month, and a tremendous total of $109,454.40 over the life of the loan!
It is also worth noting that the less equity a seller has in their home, the more attractive an assumable mortgage may become to a buyer. For instance, if that same $225,000 loan had a $210,000 unpaid balance, you’d only be responsible for the $15,000 difference, which could be an even greater savings.
FHA Assumable Mortgage Requirements
Federal Housing Authority (FHA) loans qualify for assumption because they are free from the restrictions of “Due on Sale” clauses that are common in conventional mortgages.
Buyers wishing to assume an FHA mortgage must have a minimum credit score of 620, although buyers with scores above 580 may be eligible with additional restrictions. Similar to a conventional loan, your debt-to-income ratio including the assumed loan’s payment, cannot exceed 43% (though in special circumstances it can go as high as 50%).
VA Mortgage Requirements (not just for veterans)
The United States Department of Veterans Affairs has long offered one of the best home loan programs available for veterans and their dependents.
VA loan assumption requirements include:
- Meeting the VA standards for creditworthiness and income
- Assumption of all mortgage obligations, up to and including the obligation to repay the VA if you should default on the loan
- A “funding fee” equal to 0.5% of the current loan balance (only the principal amount)
Buyers who are VA-eligible (meaning that you would otherwise qualify for a VA home loan but prefer to assume the mortgage of a veteran), may trade their eligibility to purchase the home for the seller’s eligibility. However, those individuals should first consult with their lender to identify any potential liability issues.
Want to know more about VA mortgages? Get the bigger picture about the special rates and other beneficial considerations made for loans to U.S. veterans.
All mortgage payments must be current at the time of closing. You should plan to provide funds necessary to clear any outstanding payments before you can assume the loan. Either the buyer or seller can bring the loan to good standing.
How to Assume a Mortgage in 6 Steps
While assuming a mortgage can be easier and much less time-consuming than taking out a new mortgage — assumption can often be done in as little as 30 days — it is important to know what to expect during the process. So, we put together a list of seven key steps to follow when assuming a mortgage:
1) Do Your Research
Before you put time and effort into the process, be sure the home loan you wish to assume qualifies. Also, plan to speak to the original lender and ensure they’re onboard with the assumption — the seller may not have all the pertinent info or a full understanding of the process and requirements. You may also want to consult with a real estate professional.
2) Know the Fees
Although assuming a mortgage often costs less than obtaining your own loan, there are still certain fees that need to be considered. Depending on your state, you can expect to pay between $1,000 and $1,500 for title and escrow fees, recording, credit report inquiries, and other incidental costs.
Assumable mortgages also may have an ‘assumption’ fee, but, not to worry, that amount is capped for both FHA ($900) and VA (.5% of the loan) loans. In the rarer case of assuming a conventional loan (often one that’s been passed down by a family member), the mortgage assumption fee may be higher — up to 1% of the total loan amount.
3) Secure the Down Payment
The less equity the owner has in the home, the less your down payment will be. You’ll need a strategy to come up with the down payment, and many buyers may still need to obtain an additional mortgage to cover the total home price, using their savings or non-traditional financing measures.
4) Get Lender Approval
The seller does not have the final say on whether or not you’re able to assume their mortgage; that decision lies solely with the original lender. You’ll need to fill out an assumption packet, which will include a loan application, credit authorization, verification of income, an identity affidavit, and other forms you’ll need to sign.
You will also need to provide financial information, such as:
- Pay stubs for the past 30 days
- W-2 forms for the past two years
- Bank statements for the past 60 days
- Property tax statements for the home you’re hoping to purchase
- Homeowners insurance
- Tax returns for the last two years, if you are self-employed
If you end up borrowing from more than one lender to complete the mortgage assumption, be sure that each lender is informed of all loan activity for the home. Different lenders may require slightly different information so prepare ahead of time for varying requests during the financial evaluation process.
Fortunately, a mortgage assumption generally moves quickly — sometimes in as little as 30 days. During this time, be sure to keep all of your documentation readily accessible so you can promptly answer any follow-up questions your lender should have.
5) Sign on the Dotted Line
Congratulations! The lender has approved your mortgage assumption. Now it’s time to finalize the paperwork.
You and the seller will both sign a mortgage assumption agreement. (You can actually do this before you get the final decision in order to save time, but make sure it’s contingent on the lender’s approval.)
You may also be asked to sign a document releasing the seller’s liability on the mortgage. This protects them from being held responsible for any part of the loan moving forward.
6) Attend the Closing, and Get the Keys!
Closing on your new home is a time for celebration — and of course, providing more signatures. Be sure you read and understand all the documents set in front of you; if you have any questions, now is your last chance to ask.
Happily, closing costs are typically much lower for an assumed mortgage than for a traditional one. Use the savings for a nice dinner and enjoy your new home!
Special Circumstances for Assuming a Mortgage
Although many people actively seek out assumable mortgages, citing savings of both cost and time, there are circumstances in which a buyer would need to assume a mortgage.
Can I Assume the Mortgage if a Loved One Has Passed Away?
Yes. In the unfortunate circumstance of a loved one passing, assuming the mortgage may be useful if you wish to keep their home within your family.
According to the Consumer Financial Protection Bureau, in some cases you may not be subject to the Ability-to-Repay (ABR) rule that requires lenders to ensure you have the financial means to keep the house that was willed to you, or that you otherwise have rights to as a “successor in interest.”
This interpretive rule allows you the same rights the original borrower had, including the right to negate the “Due on Sale” clause (often associated with a conventional mortgage) and go through the proper channels to assume the mortgage.
If a Divorce Necessitates a Division of Assets, Can I Assume the Mortgage?
Yes. If you have recently finalized a divorce, one party or the other may have been awarded the family home. Assuming a mortgage is one means of shifting the responsibility of the payments, but again, the lender is not legally obligated to do so.
In such a case, if you’re the one keeping the home, you’ll need to qualify to assume the mortgage under your income and credit score alone or by showing six months of timely payments made by you alone.
Once you (or your former spouse) assumes the mortgage, the party who will no longer reside in the home should be released from all liability if approved by the lender and the proper paperwork has been completed.
Can I Assume a Mortgage That’s Currently in Foreclosure?
Yes. Facing foreclosure is stressful, and a homeowner may want to do anything and everything to prevent it — and allowing another party to assume the mortgage is an option.
However, the buyer will need to reinstate the loan, also described as “paying off the past due amount before the assumption can go through.” Buyers may accomplish this by bringing in cash or taking out a 2nd loan.
If it’s a Fannie Mae loan in question, the servicer will review the current borrower’s financial packet to determine if they can afford the payments on the mortgage. Each investor or insurer will have specific requirements around what is required to complete the assumption.
If you’re set on the property as your dream home, if the default amount isn’t unreasonable, and if the interest rate for the assumption is right, then it can be worth the extra cost and effort to secure the loan.
Pros and Cons to Assumable Mortgages
There are plenty of reasons to assume a mortgage: namely, lower interest rates, more favorable terms, and lower (or non-existent) closing costs. You may be able to close on the home sooner, you won’t need to obtain your own mortgage for the full cost, and if you’re buying a home with low equity, you may be able to avoid taking out a separate mortgage at all.
As long as the loan qualifies for assumption, the drawbacks are minimal. The most common issue is simply clearing up debt incurred by any mortgage payments missed by the previous borrower.
Does a Mortgage Assumption Make Good Financial Sense?
Assuming a mortgage can be an attractive option for buyers who don’t want to (or can’t) secure their own mortgage, as well as those who want to take advantage of the savings that come with a lower-interest loan.
But before assuming a mortgage, be sure you consider the pros and cons of your situation, and carefully examine your own finances before proceeding. It’s important that you understand the debt and obligations you will take on if you do so. And while FHA and VA mortgages are inherently assumable, each version still comes with particular requirements and qualifications.
Whether you have a conventional mortgage, a VA or FHA loan, an assumable mortgage, or other, PennyMac is here to help! Contact a PennyMac Loan Officer or begin your pre-approval application online to take the first step toward homeownership!