Most people think that purchasing the home of their dreams and taking out a mortgage go hand in hand. However, there is a type of mortgage that presents a beneficial and practical approach to home financing. Depending on the circumstances, assuming a mortgage can be an advantageous yet easy method of getting the home you want while simultaneously taking advantage of several benefits.
But how to assume a mortgage? To assume a mortgage, you have to qualify as if you are applying for a new loan. Provided the lender has approved you based on your credit report, financial, and employment information, you take on the liability for the debt. From that moment on, you are responsible for taking care of the monthly mortgage payments of the previous borrower.
Although it seems easy to grasp, there is a plethron of details and specifications regarding the assumption of a mortgage. The vastness of this topic was enough of a motivation for me to create an article that will give you an in-depth explanation of everything you need to know about an assumable mortgage. By the end of the article, you will know so much about the topic that you will even advise others. Let’s learn how to assume a mortgage already!
How to Assume a Mortgage?
As I already mentioned, you first need to be approved by the lender, as they need confirmation that you can be a trustworthy payer. The lender based their decision on factors such as your credit history, credit score, debt-to-income ratio, employment history, income assets, and liabilities. The original borrower is released from their responsibility to pay off the debt, and you take their place as the new borrower.
Let’s go over the essential details of a potential assumable mortgage. A lender appraisal won’t be necessary, meaning the lender won’t require a re-evaluation of the property.
The mortgage terms are directly transferred from the owner of the home you are acquiring to you. This clarification means that you get the current interest rate, principal balance, repayment period, and any other clause included in the initial agreement.
Let’s put this into perspective. If there are five years left on a 30-year mortgage, you will still take advantage of the interest rate in the contractual agreement back when it came into force.
Regardless of how low the interest may have been when the original owner applied for the mortgage, it remains unchanged in current times. This small detail can save you thousands of dollars, considering the increasing interest rates on mortgages nowadays.
Another advantage when you assume a mortgage is the more affordable closing costs. Taking out a mortgage is associated with thousands of dollars spent on attorney fees, property taxes and homeowner’s insurance, mortgage insurance, and lender fees.
The Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA) have set specific limits on fees related to mortgage assumption. These limits guarantee that you will pay a reasonable price for assuming the mortgage at hand.
Although the advantages of assuming a mortgage are an enticing incentive, there are a few negative factors that you should consider. One of these disadvantages is the rather substantial amount you may or may not have to pay as a down payment.
I will explain what I mean in a simple manner. You are already aware that you have to assume the remaining debt of the previous owner. Let’s say that in this case, you will owe the lender $100,000. Unfortunately, the market value of the home (home equity) has risen since the initial agreement.
You will have to pay this difference in the form of a down payment, which may either be an affordable sum or an impossible task depending on the time that has passed. Keep this in mind before closing the deal.
What Are the Main Disadvantages When You Assume a Mortgage?
The two main disadvantages you should carefully analyze are the down payment, which brings several issues of its own, and the monthly insurance on FHA loans.
I elaborated on how the down payment works in a mortgage assumption in the previous segment. It can be an unpleasant situation, but fortunately, there is a solution.
A second mortgage. I am not joking. In order to cover the down payment, it is advisable to take out a second mortgage. However, the interest rate will be substantially higher, and the closing costs on the second mortgage will be nothing like the assumable mortgage. The lender is also often not cooperative.
Still, if the calculator shows that you will still save a lot despite these complications, it is wise to take that route.
If you were to assume an FHA loan, get ready to pay for monthly mortgage insurance for the remainder of the mortgage. You can only avoid this by refinancing.
Which Are the Types of Mortgage I Can Assume?
I already mentioned some of the agencies that offer assumable mortgages. These are USDA, VA, and FHA loans.
I should note that each agency has a specific set of requirements that you should meet to qualify for an assumable mortgage. Reaching out to the lender will provide you with much-needed clarity on the status of the mortgage.
It turns out that assuming a mortgage is quite a simple procedure that barely takes any effort. Factors like a good credit score, a solid income, and a stable financial situation are all it takes to qualify for mortgage assumption.
What takes a lot of effort, however, is analyzing every single detail of the potential deal. The monthly payment and the additional fees are a single aspect of the whole agreement. The possibility of taking out a second mortgage to cover the considerable down payment, the mortgage insurance, and the lack of sufficient cooperation from the lender may leave you perplexed.
All things considered, there is a high likelihood that you will save a substantial amount of money if you assume a mortgage in the right circumstances. A low-interest rate and minimal closing costs with an affordable down payment can make an assumable mortgage a deal of a lifetime for you.