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Assuming a Mortgage: Steps and Essential Guidelines

Mortgage assumption is the process of legally transferring an existing mortgage loan from the seller of a home to the buyer. When a mortgage is assumed, the buyer takes over the remaining balance and becomes responsible for repaying the loan. The buyer also takes over the interest rate and terms of the original mortgage.

Mortgage assumption allows a home buyer to obtain financing without having to apply and qualify for a new loan. By assuming the seller’s mortgage, the buyer can take advantage of a potentially lower interest rate compared to current market rates. Assumable mortgages are also processed faster and have lower closing costs than refinancing or obtaining a new mortgage.

However, only certain types of mortgages can be assumed. These include VA loans, USDA loans, and some FHA loans. [Source: Rocket Mortgage] The original lender must approve the assumption before the sale can be finalized.

Why Would You Want to Assume a Mortgage?

There are several potential benefits to assuming the seller’s mortgage rather than getting a new loan:

  • Lower interest rate: If interest rates have risen significantly since the seller obtained their mortgage, assuming that loan could allow the buyer to get a lower rate than available today. This saves money over the life of the loan.
  • Avoid closing costs: The buyer can avoid thousands of dollars in closing costs by not taking out a new loan. Closing costs on a new $300,000 mortgage often total $6,000 or more.
  • Faster process: Assuming an existing mortgage is often much faster than applying for a new loan. This can help buyers who need to close quickly for any reason.
  • Easier to qualify: The lending standards required to assume a mortgage are typically less strict than when applying for a new home loan. This allows more buyers to qualify.

For these reasons, assuming a mortgage can make financial sense for eligible buyers under the right circumstances.

Who Can Assume a Mortgage?

While mortgage assumption can benefit some home buyers, it is not an option for everyone. The mortgage lender must approve the buyer in order for them to assume the mortgage. This includes checking the buyer’s credit score, income, and debt-to-income ratio. [Source: Bankrate]

In most cases, the lending standards are similar to obtaining a new mortgage loan. The buyer will likely need:

  • A credit score of at least 620 or higher 
  • A debt-to-income ratio below 50%
  • Sufficient income to afford the monthly payments
  • A down payment, if required by the loan type 

As such, assuming a mortgage is only a viable option for creditworthy buyers who meet the normal lending requirements. The seller also has to approve of transferring their mortgage to the new homeowner.

What are the Requirements for Assuming a Mortgage?

There are several requirements buyers must meet to qualify for mortgage assumption:

1. Creditworthiness

Lenders will review the buyer’s credit report and look for a sufficient credit score, typically 620 or higher. A higher score improves the chances of approval. The lender wants to see responsible credit use including on-time payments. 

2. Financial Stability

Assuming the mortgage is a long-term financial obligation. Therefore, the lender will verify the buyer’s stable income and that their total debts are not excessive. Most lenders require a debt-to-income ratio below 50%.

3. Approval from Lender

The buyer needs formal approval from the mortgage lender before the assumption can go through. The lender will issue loan assumption documents for all parties to sign once the buyer has met the qualification requirements.

By satisfying these key criteria, a buyer can increase their chances of successfully assuming an existing home loan from the seller.

Steps to Assume a Mortgage

Follow these general steps to assume a mortgage:

1. Check if the Loan is Assumable

The first step is to confirm that the specific mortgage you want to assume is legally transferable. Only certain types of mortgages can be assumed. These include VA loans, USDA loans, and some FHA loans. [Source: Rocket Mortgage] Conventional loans are typically not assumable.

2. Apply for the Loan Assumption

Once you confirm the loan can be assumed, complete a loan assumption application with the lender. Be prepared to provide financial documents to prove your creditworthiness and income.

3. Undergo Credit Check and Financial Review

The lender will pull your credit report and verify your financial qualifications. The lender may have to pay a fee to the lender to assume the mortgage. This fee is typically around $500. [Source: Consumer Financial Protection Bureau]

4. Pay the Assumption Fee and Closing Costs

In addition to any loan assumption fees charged by the lender, you will also need to pay closing costs. These costs can vary depending on the location and the purchase price of the home. [Source: NerdWallet] Budget 1-5% of the home price for these fees.

5. Sign the Loan Agreement

Once approved, you will sign an agreement with the lender formally assuming all repayment obligations under the mortgage. This contract transfers responsibility from the seller to you.

6. Start Making Payments on the New Loan

As the new owner, you begin making the monthly principal and interest payments on the assumed loan. Make sure to pay on time going forward to avoid financial penalties.

By following this process, you can execute a smooth mortgage assumption when buying a home under the right conditions.

What are the Risks of Assuming a Mortgage?

While mortgage assumption offers advantages, there are also potential risks to consider:

  • The loan terms and interest rate are fixed – you can’t easily refinance or negotiate changes.
  • Missed payments by the previous owner can still impact your credit score.
  • You remain obligated to repay the loan even if you sell the home before it’s paid off.
  • Home insurance costs could rise due to changes in coverage requirements.
  • You may not qualify for mortgage payment assistance programs later if you encounter hardship.

To mitigate risks, work with a real estate attorney and scrutinize the loan documents before agreeing to assume any mortgage. Only proceed once you fully understand the legal implications. An attorney can help ensure you are protected.

What are the Benefits of Assuming a Mortgage?

When used strategically, assuming an existing mortgage can offer real financial advantages:

  • Lower interest rate: This is the primary benefit – monthly savings from a lower rate than you may qualify for with a new loan in the present market. This savings adds up over the many years of repayment.
  • No closing costs: Avoid thousands in lender and third-party fees by not obtaining a new mortgage. Typical closing costs run 2-5% of the loan amount.
  • Faster process: Assumption can take just 2-4 weeks from application to close. New mortgages often take 4-8 weeks at minimum.
  • Easier to qualify: For buyers unable to meet strict approval criteria for a new mortgage, assumption loosens some of these requirements. For example, assuming a mortgage can be a good way for buyers to save money on interest. [Source: Rocket Mortgage]

Assuming an existing mortgage can therefore make homeownership more accessible and affordable under the right circumstances.

Can You Assume an FHA or VA loan?

Certain government-backed loans can be assumed:

FHA loans originated after December 1989 can be assumed by qualified buyers. However, the new borrower must be approved by the lender and abide by normal FHA borrowing limits and requirements.

VA loans are assumable with lender approval. As with the FHA loans, the new borrower must meet VA loan qualifications.

USDA loans guaranteed by the U.S. Department of Agriculture are also assumable in most cases. These loans primarily help low/moderate income buyers in rural areas.

Always consult with the lender to determine if a specific government-insured mortgage can be transferred to a new buyer via assumption. Unique stipulations may apply depending on when and how the loan originated.

How Does Divorce Affect Mortgage Assumption?

If a married couple divorces, their joint mortgage can still be assumed by one spouse only if:

  • The lender approves the spouse by themselves.
  • The other spouse agrees to give up ownership rights and any claim to the property. 
  • A formal quitclaim deed is filed transferring the home fully to the spouse keeping the house.
  • The spouse keeping the home can qualify for and afford mortgage payments independently. 

Without the agreement of the other spouse via a legal quitclaim deed, it is difficult for one spouse alone to assume the mortgage. Speak with an attorney to understand options in the event of divorce.

In 2022, only 3% of all mortgages were assumed. [Source: Mortgage Bankers Association] However, under the right circumstances, assumption can be an advantageous way for a buyer to obtain home financing while saving substantially on interest costs and upfront fees. Always consult professional legal and financial guidance to determine if assuming an existing mortgage aligns with your specific home buying objectives and financial situation.