Buying a House With an Assumable Mortgage: Pros and Cons
Buying a home means making many decisions, including the best way for you to pay for your home. If you decide to buy with a mortgage, you’ll have a variety of mortgage loan types to choose from. Some sellers try to garner more interest in their property by offering an assumable mortgage.
While a mortgage assumption has both advantages and disadvantages, it can be an appealing option to both home sellers and buyers. Here’s a closer look at how assumable mortgages work and how you can decide if this home loan is the right option for you in the buying or selling process.
What Is an Assumable Mortgage?
In an assumable mortgage, a buyer agrees to take over the remaining balance on the seller’s mortgage loan. The seller will transfer the ownership of the house and the outstanding amount on the mortgage balance. When the buyer takes over the existing mortgage loan, the seller receives the value of their equity in the home.
There’s a variety of reasons why someone might choose to pursue a loan assumption. One of the top reasons is if interest rates have risen in the current market since the seller purchased the home. By taking on the existing mortgage rate, the buyer has the opportunity to obtain lower interest rates that they might be able to otherwise. By doing this, the buyer can save money straight away.
Types of Loans That Are Assumable
It’s worth noting that not all types of loans or mortgages are assumable in a home sale.
For instance, conventional loans typically are not assumable because the mortgage contract often details a due-to-sale clause. This clause means that the lender will require the seller to pay the outstanding loan balance as soon as the house has sold, taking assumable mortgages off the table.
Only government-backed mortgages can qualify for an assumable mortgage. This includes the following:
- FHA loans — Loans insured by the Federal Housing Administration can qualify for an assumable mortgage, pending approval of the lender.
- VA loans — Loans issued through the Department of Veteran Affairs have the chance to qualify for an assumable mortgage. The buyer does not necessarily have to be a member of the military or veteran to obtain a loan through the VA.
- USDA loans — Department of Agriculture loans are typically assumable but require the prior approval of the USDA. The seller just meets certain criteria in order to qualify for a loan, such as being on time with their mortgage payments.
How to Qualify for an Assumable Mortgage
When the current borrower (the seller) signs the balance of the loan amount over to the buyer, the buyer then becomes responsible for the outstanding balance and the remaining payments. In order to take up an assumable mortgage, the buyer will need to agree to the same loan terms that the seller had. This includes both the monthly payment amount and the same interest rate.
In order to qualify for an assumable mortgage, the buyer will need to get approved by their mortgage lender. The lender will check the buyer’s credit score and debt-to-income ratio (DTI) to confirm whether they meet minimum requirements. The lender will also look at other pertinent buyer information including:
- Employment history
- Income for each applicant
- Asset verification
Pros and Cons of Assumable Mortgages
Now that we’ve established what an assumable mortgage is, it’s helpful to weigh some pros and cons that come with selecting this type of mortgage. Keep these advantages and disadvantages in mind.
As noted above, one advantage for a buyer taking over the seller’s mortgage is the possibility of receiving lower interest rates. You can also look forward to:
- An easier sale: Assuming a mortgage can be an appealing option to buyers because it can help the buyer save money. For instance, let’s say that interest rates were 5% when the seller purchased the house but now there’s a higher interest rate of 7%. By assuming the mortgage, a homebuyer can save significantly through the low rates on the existing loan. Some sellers might choose to offer an assumable mortgage clause if they are looking for a fast and easy sale.
- Lower closing costs: Another perk is lower closing costs. Closing costs typically range from 2-5% of the total loan amount. If the buyer is taking over the seller’s mortgage, the loan amount will be smaller and, therefore, the closing costs will be lower too. Additionally, it’s unlikely that you’ll need to hire an appraiser to conduct a new appraisal of the home. Not paying for an appraisal can save the homebuyer hundreds of dollars.
Now that we’ve reviewed some of the top advantages of assuming a mortgage, here are some downsides to keep in mind:
- Large down payment. Keep in mind that an assumable loan very rarely covers the full purchase price of the house. The potential buyer’s down payment must be large enough to buy out the seller’s equity in the property. Since the home has increased in value, this can be a large amount. As a result, the buyer is responsible to pay the difference out of pocket as part of the down payment. This means that the down payment can be higher than if you weren’t purchasing through an assumption.
- Hard to obtain. While not impossible, eligibility for an assumable mortgage can be difficult to secure. Lenders have strict income and credit requirements for assumable mortgages. Additionally, keep in mind that only certain types of loans can be assumable.
Deciding If an Assumable Mortgage Is Right for You
As a seller or buyer, you’ll need to decide if an assumable mortgage is the best course of action for you. While this can be a hard decision, here are two factors to keep in mind.
Look for an Assumption Clause
An assumable mortgage will have an assumable clause in your mortgage contract, which enables you to transfer your mortgage to the next buyer. Assumption clauses typically include a fee to transfer from one borrower to another. This amount can vary from state to state, but the buyer can expect to generally pay a fee of 2-5% of the loan amount.
As a seller, you will be faced with the risk of a buyer missing payments, which could negatively impact your credit score. To avoid this, it’s best for lenders to approve an assumable mortgage so that the seller can be protected financially.
Become a Homeowner Through Aalto
Deciding if an assumable mortgage is right for you can be a difficult decision. Thankfully, Aalto is there to help guide you through the process so you can buy a new home with confidence. At Aalto, we are committed to working with potential buyers and setting them up to succeed in their journey to homeownership. Our self-service platform connects buyers and sellers together directly so you won’t need to hire a traditional real estate agent.
Buyers can look forward to plenty of perks when it comes to purchasing a home with Aalto. This includes access to hundreds of listings that you won't find elsewhere and the chance to receive up to 3% cash back when you buy a home. Sign up on Aalto today and find your dream home on your terms and in your time frame.
Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.