Learn how to assume an assumable mortgage and find out if it's the right move for you.
One of the benefits of mortgages from either the Federal Housing Administration (FHA) or Veterans Administration (VA) is that both types of loans are assumable. If you are interested in a home with an assumable mortgage, you will still have to qualify for the loan but you may save on your interest rate and closing costs.
In the past, home buyers did not even have to qualify to assume an FHA or VA mortgage. All they had to do was fill out a form and pay a fee and they could buy a property from a seller. The rules were changed in 1988 for FHA and 1989 for VA so that all home buyers assuming either type of loan must qualify just as if they were applying for a new loan.
Since you have to qualify for loan that you assume, what are the reasons for assuming an FHA or VA loan? Home buyers may be able to assume a mortgage with a lower mortgage interest rate than is available in the current mortgage market. Saving on rate is the biggest reason for assuming an FHA or VA loan.
The other reason for assuming an existing loan is that the home buyer may be able to avoid a down payment. If the property value is equal to the loan amount, a seller would most likely be willing to simply sell the property for the loan amount just to get out of the property and loan.
If there is some equity in the property, many sellers will be willing to hold a second mortgage for any equity instead - especially in the buyer's market of today. For example, if a seller has an existing FHA loan for $125,000 and the property is worth $135,000, a seller could offer to let a buyer assume the $125,000 loan and then hold a second mortgage for the $10,000 difference. For first time home buyers, this plan is much easier and requires much less cash.
The only problem with these types of transactions is that there will not be any cash available for the seller from the closing to pay real estate commissions and any conveyance taxes that may be due at the time of closing. The seller might be required to dig into their own pocket to make the transaction work, but in many cases sellers do not have that extra cash to pay these expenses. If there are real estate agents involved in the sale, you may need to negotiate the amount or the timing of the payment of these commissions if the real estate agents are willing to make the sale this way.
Assuming an existing loan can also help eliminate many closing costs. While there may be an assumption fee charged by the lender of up to a few hundred dollars, this fee is almost always lower than the many fees normally associated with obtaining a mortgage. Buyers do not have to pay any points, appraisal fees, lender fees. However, buyers will be responsible for title insurance, a title search and any recording fees for the new mortgage.
Buyers may see homes advertised with assumable mortgages and may be tempted to seek out these homes as better deals. But a home is not a better deal just because it has an assumable mortgage. With the recent decrease in home prices, home buyers need to be careful that they are not purchasing a home and assuming a loan which is much more than the value of the home.
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