How does an assumable mortgage work? Seems like a great idea now!

Question

With rates 6.5%-7%, especially for investment properties right now, I just read about assumable mortgages where you simply take over the mortgage of the seller when you buy the property. How does this work? Can anyone do it? Does it cost extra?

If the property is more expensive than the seller's mortgage, can you take out a 2nd mortgage on the home? Or are you forced to simply buy the rest in equity. I'm very curious if anyone has done this or has any suggestions.

Thanks!

Kyle Baker · Answer

I am currently working the detail on an assumable deal and I agree now is a great time for them and I see them making a comeback. Its a pretty specific scenario where they make sense but here is essentially how they work...

First the sellers mortgage company has to allow for assumable mortgages. Assuming they do then the new purchaser has to qualify for the left over mortgage. If they do they can take over (assume) the existing mortgage as well as keep their interest rate. Keep in mind only certain financing terms can be assumed. They have to be government back loans. Think FHA, VA and USDA. Conventional loans, from my understanding, cannot be assumed.

The second part of your question....yes you can take out a second mortgage in order to pay the equity or of course pay cash. There are also some closing costs involved so expect some fees just like getting a new mortgage but not nearly as much because they don't require things like appraisals. Okay let me tell you my example and hopefully it answers any other questions.

My client got a VA loan for 180k loan about 16 months ago. He is now potentially going to be transferred out of state and needs to sell his home. The properties comps are now around 200k which leaves him around a break even or possibly even in the red a little after closing costs and realtor commissions. Bring in the assumption!

SO first benefit for a potential new buyer would be his 3.7% interest rate. Second is with him having a VA loan there is now mortgage insurance. Win win!

NOTE** a buyer does not have to be VA eligible to assume a VA mortgage, however if the new buyer is not a VA eligible then the original VA purchaser would "lose" that VA eligibly amount of the loan until it is either paid off, sold or refinanced. I know that sounds a little confusing so let me try to explain further.

Depending where you live you have $xx to spend on a VA loan. In Indiana the VA loan cap as of Jan 2022 is $647,200. So with that being said if you had a VA loan of $180,000 then you would have $467,200 left. 647,200-180,000. So  until that existing VA loan is paid off the original borrower would have that $467,200 left over. Again I know that can be a little confusing so I hope that made sense.

All in all it takes a very specific scenario for this to work but I think it can be a great option. For my client we will try to get a little more for the house as the new borrower is essentially buying the interest rate. Comps for his home are around 200 and I think we can easily get 210-215k because of the rate.

Feel free to hit me up if you have any more questions. I hope this helped

John Underwood · Answer

Look up "Subject to" mortgage.

This is how you take over a mortgage even when not technically assumable.

Eliott Elias · Answer

These are rare, but you can do it. You will have to come out of pocket the difference the seller wants in cash, can't be borrowed by a bank

Wale Lawal · Answer

@Scott K.

An assumable mortgage allows the buyer to purchase a home by taking over the seller's mortgage loan. One reason buyers decide to buy a home with an assumable mortgage is to take advantage of financing with a lower interest rate if rates have risen since the seller originally purchased the home.Which Mortgages Are Assumable?Not all home loans are assumable. Unfortunately, most conventional mortgages are not assumable. However, loans that are insured by the Federal Housing Administration (FHA) or backed by the Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA) are assumable as long as specific requirements are satisfied.For most FHA and VA loans, a seller must obtain lender approval for an assumable mortgage.FHA LoansHere are a few things you need to know if you decide to take over an FHA loan. Newer FHA loans require that both buyer and seller meet specific criteria for an assumable mortgage. Sellers must live in the home as a primary residence for a set amount of time, and buyers must go through the standard application process for an FHA loan.The good news is that for buyers is that FHA loans require a smaller down payment of 3.5%, making it an attractive and more affordable option for first-time home buyers. Plus, FHA mortgages are considered more accessible to buyers with a less-than-perfect credit history since credit scores must be above 580 to apply.Before you apply for any mortgage, brush up on ways to improve your credit score to put your best foot forward in your application.VA LoansBacked by the Department of Veterans Affairs, a VA loan is available to eligible military members, service members and their spouses. A buyer who is not a qualified current or former military service member can apply for a VA loan assumption.Depending on how the loan was set up, a lender may need to have the loan also approved by the Regional VA Loan Center, which may take additional time to process paperwork.In very rare cases, a buyer might come across a freely assumable loan that applies to any VA loan closed on or before March 1, 1988. Sellers that fall in this category do not need to obtain lender approval, but may still be liable for making payments if a buyer fails to pay their mortgage on time. However, buyers may want to think twice before taking over these types of loans since mortgages originated in the late 1980s tend to have higher interest rates.

Read this article for more information https://www.rocketmortgage.com...

Good Luck!

Colleen F. · Answer

@Scott K. it used to be common but most mortgages are not assumable anymore. It's right in the paperwork when they write the mortgage.

V.G Jason · Answer

Sounds like a great idea. How does this really differ than say seller financing?

And wouldn't seller financing have more options with it and less exposure to the original seller's bank's involvement?

How does an assumable mortgage work? Seems like a great idea now!

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