When to consider an assumable mortgage

When a home changes owners, the mortgage held by the seller is typically replaced by another one. The sale proceeds are used to pay off any outstanding balance, with the remainder going to the seller. The buyer, meanwhile, often takes out their own mortgage to help pay down the sum they offered for the property.

An assumable mortgage consolidates this process by having the loan transfer to the buyer along with the home. Depending on how this transition is arranged, it can be beneficial to either the buyer or the seller. However, an assumable mortgage isn't always available and may not make sense in every home purchase.

Conventional loans usually can't be assumed by a buyer. Cathie Ericson, writing for the National Association of Realtors, says government-backed loans such as FHA, USDA, and VA loans are typically eligible for an assumable mortgage.

While a buyer won't have to qualify for a separate mortgage to buy the property, they still need to be approved by a lender to assume the seller's loan. Justin Pritchard, writing for the financial site The Balance, says this includes an analysis of the buyer's finances and credit score. You may also need to make sure the name of the property's title is transferred through a quitclaim deed.

When the buyer assumes the mortgage, they'll be responsible for the same payments that the seller was previously making. Ericson says one of the key benefits of an assumable mortgage is that some of the balance has already been paid off, so the buyer can get a shorter loan term. Since the seller has likely made the earliest payments, where more money goes toward interest than principal, the buyer can also build up equity more quickly.

Assumable mortgages can also help a buyer to get a more advantageous interest rate. If mortgage rates are on the rise, and the seller's loan began when rates were lower, the buyer can assume a lower interest rate than they could get by applying for a conventional mortgage.

Closing costs are usually lower in an assumable mortgage. Marcie Geffner, writing for the financial site Bankrate, says an appraisal is typically not required, allowing the buyer to avoid that fee. However, they might still want to get an appraisal if they are concerned about potentially overpaying for the property.

Assumable mortgages are less advantageous to a buyer if the value of the home has appreciated above the outstanding balance on the loan. The real estate site Zillow says buyers who assume a mortgage in this situation will need to make up the difference, either with a lump sum payment or by taking out a second mortgage. Not only does this negate some of the benefits of an assumable mortgage, but it also complicates the arrangement since it may require two lenders to coordinate on the sale.

It also makes little sense for a buyer to assume the seller's mortgage if the interest rate is higher than what is currently available. A lower interest rate will offer savings over the long term, even if an assumable mortgage allows the buyer to get a loan with a shorter term and lower balance.

The main benefit of an assumable mortgage for sellers is that the arrangement can be appealing to buyers. This can help them market the home more effectively and quickly close a sale.

Sellers may also be able to get more leverage during sale negotiations if the assumable mortgage is advantageous to the buyer. Justin Bynum, writing for the financial site Investopedia, says a seller might set a higher asking price, ask the buyer to cover closing costs, or even ask for a cash payment of some of the savings the buyer will realize over the life of the loan due to a lower interest rate.

An assumable mortgage can also create a number of headaches for the seller, however. Pritchard says that since the arrangement might offer few benefits for the lender, they may require that the loan be paid in full once the home sells. Geffner says the lender may also keep the seller as a liable party on the mortgage, making them vulnerable if the buyer does not keep up with payments.

Assumable mortgages are often used with VA loans, since military personnel need to relocate frequently, but they can also jeopardize the VA entitlement used to help purchase a property. If the buyer is not a veteran, or is a veteran without an entitlement, the seller's entitlement will stay attached to the property. This can make it much more difficult for the seller to buy their next home.

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