Skyrocketing mortgage interest rates can make homeownership seem like an elusive dream. With rates hitting their highest point in almost 23 years, the path to purchasing a home has become more challenging. For some home shoppers, there’s a potential solution: assumable mortgages. Assuming a mortgage allows you to step into the shoes of the seller and take over their loan, often at a lower interest rate. It’s a unique approach that can make your dream of owning a home in today’s complex, high-priced housing market more attainable. In this guide, we’ll walk you through the ins and outs of assumable mortgages, helping you make an informed decision that’s right for you. An assumable mortgage allows a buyer to purchase a home by taking over the seller’s existing mortgage loan. One reason more buyers are seeking assumable mortgages is to take advantage of lower interest rate financing. Many home sellers entering the market today refinanced during the pandemic era of historic low interest rates. Thus, assuming a mortgage can be like inheriting a financial advantage. Rather than taking out a new loan at a high rate, the homebuyer can assume the interest rate, current principal balance, repayment period, and other terms of the seller’s existing mortgage. However, not all mortgages are assumable, and there may be specific qualifications and fees associated with the assumption process. To determine if a mortgage loan is assumable, you need to consider the type of loan and its specific terms. The most common loans that can be assumed are typically government-backed or government-insured loans. Here are some common types of mortgage loans and their assumability: Federal Housing Administration (FHA) loans are often assumable. This means that a qualified buyer can take over the existing FHA loan, subject to lender approval. You will need to qualify for traditional FHA loan requirements, such as having a credit score of at least 580 and being able to make a minimum down payment of 3.5%. Similarly, loans guaranteed by the Department of Veterans Affairs (VA) are typically assumable. However, you’ll need to meet certain eligibility criteria, such as holding a credit score of 620 or higher, and the VA must approve the assumption. Surprisingly, you don’t necessarily need to be a veteran or active military service member to assume a VA loan. As with other lending options, your creditworthiness as a borrower will play the biggest role. You will also be required to pay the standard 0.5% VA funding fee. United States Department of Agriculture (USDA) loans may also be assumable, but like VA loans, they come with specific conditions. In this case, you’ll likely need approval from both your lender and the USDA, and still hold a credit score of 620 or higher. An assumed USDA loan is typically assigned a new interest rate and terms. However, in some circumstances, like the transfer of property within families, the loan can be assumed with the original rate and terms without the borrower meeting all the eligibility requirements. Some ARMs may be assumable, allowing the new buyer to assume the existing interest rate and terms, but this is not a common scenario. Depending on the lender, the new borrower may need to agree to give up the option to convert the ARM to a fixed-rate mortgage. In cases where a conventional ARM loan has been deferred or modified to help the borrower avoid default, the loan is likely no longer eligible to be assumed by a third party. The majority of conventional mortgages offered by private lenders — loans backed by Fannie Mae and Freddie Mac — are not assumable. These loans often contain contracted terms that mandate the mortgage be paid in full when the original borrower sells the home. They are known as a “due on sale” or “due on transfer” clause. Some conventional loans can be assumable in cases that involve special circumstances, such as after a death or divorce. To qualify, the homeowner’s mortgage contract would need an “assumption clause” noted in the mortgage contract. An assumption clause allows the mortgage holder to transfer the loan to another party. But even with this provision, the mortgage lender typically needs to approve the transfer. The new borrower would still need to meet the loan’s eligibility requirements.What is an assumable mortgage?
Which mortgage loans are assumable?
1. FHA loans
2. VA loans
3. USDA loans
4. Some adjustable-rate mortgages (ARMs)
Are conventional loans assumable?
