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Assumable Mortgages: Can I Take Over A Seller’s Mortgage?

In today’s more challenging housing market, buyers are exploring an array of creative options to make home purchases more affordable. This includes the renewed interest around assumable mortgages.

Simply taking over another homeowner’s mortgage sounds excellent — no muss, no fuss, just step in and pick up where the previous owner left off.

Unfortunately, it’s often not quite that easy. Conventional mortgages are not assumable, but federally guaranteed loans such as those through the FHA, VA, and USDA can be, after you jump through a couple of hoops required to qualify for those programs. You’ll also have to pay any difference between the mortgage balance and the home’s current value, which could mean getting a second mortgage

Let’s take a deep dive into the mechanics behind assumable mortgages, how they work, and whether they could be the best option for acquiring the home you’ve always wanted.

The Inner Workings

An assumable mortgage allows a home buyer to take over the mortgage debt on a property rather than securing their own new financing.  

This maneuver is especially popular with veterans, which allows current or former service members and their qualifying spouses to substitute their VA entitlement onto the mortgage (in the case of a veteran purchasing from a veteran), which releases the seller’s entitlement for use on a new VA-backed loan

This approach can also be executed by a non-veteran purchasing from a veteran, who is currently in a VA loan. In that case, the entitlement stays with the home (loan), and the departing veteran will either not have access to use their VA benefits on the new home, or will have a substantially reduced benefit left to them in the purchase of their next place. 

Assuming an FHA loan does not have the concern about VA benefits, of course, though still needs to clear the qualification hurdle, and may not cover the full value of financing the new buyer requires. 

Why would a hopeful homeowner want to assume someone else’s mortgage? The appeal lies in several potential advantages over a conventional loan:

According to the National Association of Realtors, mortgage assumptions haven’t been common since the 1980s, when prospective buyers were delighted when they scored a rate substantially higher than they are today.

A mortgage assumption can also happen when one spouse takes over paying the loan following a divorce or death. Your family home is probably the most valuable asset to be involved in your divorce or estate plan, and there are plenty of misconceptions about what’s actually involved in the transfer of real estate during these difficult life transitions.  

Demystifying the Process

The first step in getting any kind of mortgage is qualifying with the lender. This journey involves checking your credit score, calculating your debt-to-income ratio, reviewing your employment history, verifying your income, and verifying you have the necessary assets to make the required down payment.

This leads to one of the biggest drawbacks of assuming someone else’s mortgage — how much you’ll need to pay to make up the difference between the amount still owed and the current market value of the property, which could be a substantial amount. 

You’ll also have to meet the income and credit requirements for an FHA, VA, or USDA government-backed home loan, just as if you were applying for a new mortgage. Sellers also have to meet certain criteria, such as occupying the home for a set period before the sale.

It’s easy to feel overwhelmed when imagining all of the hoops you need to jump through to purchase a safe and secure home for you and your family. Partnering with an experienced and knowledgeable mortgage lender will help gain confidence and the advantage you need to succeed in this competitive market.

Making an Informed Decision

An assumable mortgage could be a way for you to score a much lower interest rate, which could save you thousands of dollars and help you land a bigger and better piece of real estate. 

However, while 85% of properties have existing loans with an interest rate below 5%, most mortgages aren’t assumable. Government-backed loans, which can be assumable, only account for 18-26% of residential applications, per the weekly applications survey performed by the Mortgage Bankers Association

It all comes down to determining the best strategy for your particular financial situation and working with a savvy and skilled lender and a real estate team that can help you explore all of your available options. 

Keep in mind that if you’re unable to find the ideal assumable mortgage and go the conventional loan route, you may be able to refinance down the road to a much more favorable interest rate than those available now.

Whether you’re looking for a forever home, a vacation or retirement getaway, or a rental income-producing investment property, I’m here to answer your questions and help you find the right path to ownership — call me today!

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