Simply put, an assumable mortgage allows a buyer to assume the rate, repayment period, current principal balance and other terms of the seller's existing mortgage rather than obtain a brand-new mortgage, according to James Hines, a spokesman at Wells Fargo Home Mortgage.
It should be possible to assume any type of mortgage, but it is usually an FHA loan or a VA Loan.
There are certain advantages for a buyer when assuming a mortgage. "An assumable mortgage can be very attractive if interest rates are on the rise or the current interest rates are significantly higher than the interest rate on the seller's existing mortgage," Hines explains.
In addition, the buyer doesn’t have to pay points, for an appraisal or any other closing costs. Not to mention the length of the mortgage is shorter for the buyer who is getting a home for less than the cost of the original purchasing price.
Seems like a win-win situation right? It may not be as simple as it seems because of the “non-assumable” clause. Just as it says, it’s a clause that almost all conventional mortgages have a clause that stated the mortgage cannot be assumed/ taken over. Many lenders add this clause to protect their interests. If a creditworthy buyer comes along, they can assume the mortgage, but the risk of default is higher in assumed mortgages.
A “due on sale” clause doesn’t mean a mortgage cannot be assumed, it actually can, but this clause means that the entire mortgage balance is due at the time of the mortgage transfer.
These are complex because even though the terms of this clause says that the mortgage debt is due in full at time of transfer, the lender has the option to delay the repayment. They can change the terms of the repayment at their discretion. A buyer could want to pay off the mortgage at the time of the transfer to avoid paying more interest, whereas a lender may prolong the repayment for the additional interest accrued.
Of course, the best way to circumvent these clauses is to get permission from the lender to assume a mortgage. The lender can always say they will waive that clause and allow a transfer if the buyer meets very strict requirements. The buyer has to actually qualify for a loan so the lender can see that they are able to repay the mortgage. It may be easier to assume a FHA loan since the criteria for these loans are more lenient. But ultimately it is up to the lender.
If a mortgage assumption is something you’re interested in, the best way to do it is with the lender’s consent. Make sure you know your legal rights in doing a mortgage assumption and that all transactions are following the letter of the law. Any concealment can be a violation of either clause and can open you up to penalties. It can also hurt the seller because until the transfer is complete and legal, they are still liable for the mortgage that they can damage their credit for future purchases.