Assumable Mortgage | Mortgage Investors Group (2024)

FAQs

What are the downsides of an assumable mortgage? ›

If the seller has built a significant amount of home equity, your down payment may be far higher than if you weren't purchasing through assumption. Credit and income requirements. Most sellers won't agree to sell to you through assumption unless you meet the lender's minimum requirements. No choice of lenders.

“Assumable loans are exciting if you have a massive down payment, but most people don't,” said Aaron Gordon, senior mortgage loan officer at Guild Mortgage. Without a large down payment, you may have to take out a second mortgage to pay the seller for their equity.

If the loan originated before 1988, you will not need permission from the VA or the lender to assume the mortgage. That said, if the loan originated after 1988, any loan assumption must be lender-approved. While there isn't a minimum credit score, the lender will typically look for a score of 620 and above.

You'll need to qualify for the mortgage that you're assuming, which means you may need a credit score of at least 500 for an FHA loan or 620 for a VA loan. Although a higher credit score won't lead to a lower interest rate—because you're taking over the current loan's rate—it might increase your chances of approval.

Sellers use assumable mortgages as promotional tools to attract buyers to their homes. They can also streamline the home sale process. The main difference between an assumable mortgage and a traditional one is that the buyer does not need to apply for the mortgage to take it on.

Responsibility for Paying Closing Costs: The party responsible for paying the closing costs can also vary depending on the terms of the assumption agreement. In some cases, the buyer may be responsible for paying all of the closing costs, while in others, the seller may agree to pay a portion.

More than 11 million homeowners in America have assumable loans, according to the U.S. News & World Report. And over the past 10 years, nationally, 17.1% of mortgages were FHA loans and 7.7% were VA loans, adding up to roughly 25% of mortgages that are, in theory, assumable, according to Realtor.com® data.

When interest rates rise, an assumable mortgage is attractive to a buyer who takes on an existing loan with a lower rate. USDA, FHA, and VA loans are assumable when certain criteria are met. The buyer need not be a military member to assume a VA loan. Buyers must still qualify for the mortgage to assume it.

Assumptions Will Take 45-90 Days On Average In Comparison To Your Traditional Mortgage Taking Around 30 Days.

When you assume a loan, you do not have to make a down payment. Instead, you pay the seller compensation for the equity they have built in the home, or the difference between their mortgage balance and what the home is worth.

What type of mortgage is generally not assumable by a buyer? ›

Conventional loans, which are made by private lenders and account for about 70% of new mortgages, are generally not assumable (except in some instances such as death or divorce). Conventional loans usually have a “due on sale” clause that allows the lender to be paid in full when the property is transferred.

“We treat it as any other home purchase. If you purchase a home for $1 million and assume a mortgage of $800,000, your basis in the house is still $1 million. The only difference is that because it is not a new loan, if you pay points, they will be amortized.”

Credit Score

For a $300,000 home, you'll likely need a good credit score: 740+: Best rates and terms. 700-739: Slightly higher rates. 660-699: Higher rates, may require larger down payment.

Types of assumable mortgages

Typically, you can't assume a fixed-rate conventional mortgage. In some cases, you may be able to assume an adjustable-rate conventional mortgage. There are three main types of mortgages that are assumable, and they're all government-backed mortgages: VA, FHA, and USDA loans.

While achieving a CIBIL Score of 900 is technically possible, it is extremely rare. Scores above 760 are considered very good or exceptional, providing significant benefits such as lower interest rates and higher chances of loan approval.

An assumable mortgage can provide several benefits for the buyer and the seller, depending on the situation. First, for the buyer, the seller's mortgage may offer a lower interest rate than the current market rates, which can save the buyer a significant amount in interest costs over the life of the loan.

The Drawbacks of Mortgage Assumption

In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties' credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.

A mortgage that has been assumed by a third party does not mean that the seller is relieved of the debt payment. The seller may be held liable for any defaults which, in turn, could affect their credit rating.