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If you have an assumable mortgage, you might find selling your home much easier. Read on to find out why.
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If someone is in the market to buy a home today, you might think they’ll be stuck paying about twice the average mortgage rate of a couple years ago. But if the home has an assumable mortgage attached to it, that might not necessarily be the case.
Assuming a mortgage means that a mortgage is transferred from the original borrower to someone else. In other words, the standard sequence of events when you sell a house is that your existing mortgage is paid off with the proceeds from the sale, and the new buyer will then apply for and receive a new mortgage loan. With an assumable mortgage, the buyer will simply take over the existing mortgage, transferring the loan into their name and removing the original borrower’s.
When a mortgage is assumed, all of the loan terms remain the same, including the outstanding principal, remaining loan term, interest rate, and monthly payment. The only thing that changes is the person responsible for making payments.
Benefits and drawbacks of assumable mortgages
This can be a major selling point if you bought your house with an assumable mortgage with a low interest rate. For example, if you can offer an assumable mortgage with a 3.5% rate and new mortgages are being offered with a 6.5% interest rate, it can make your home much more attractive to potential buyers.
Assumable mortgages aren’t always ideal. For example, if you’re aiming to sell your house for $500,000 and only owe $300,000 on your assumable mortgage, the buyer will still need to figure out where the other $200,000 is coming from, which means either a separate loan or a larger down payment.
Can your mortgage be assumed by someone else?
The short answer is “it depends.” Not all mortgage loans are assumable, and even if yours is, the new borrower will need to meet certain qualifications before assumption can take place.
The bad news is that conventional mortgage loans are generally not assumable. However, several other types of loans are, specifically the three major types that are backed by government agencies:
FHA loans: All FHA loans are assumable, but the borrower must meet the same eligibility requirements as a new FHA loan applicant, such as a credit score of 580 or more with less than 10% down and a debt-to-income ratio of 43% or less.
VA loans: VA loans are particularly interesting because they are assumable even if the new borrower never served in the military. To assume a VA loan, a borrower can use their own VA loan eligibility in place of the seller’s or can meet the lender’s financial qualifications to apply.
USDA loans: USDA loans are government-guaranteed mortgages that can be used to buy homes in certain rural areas and can be assumed by a buyer that meets the USDA and lender’s qualification requirements.
Why an assumable mortgage can be such an asset
The most obvious benefit to an assumable mortgage is that a buyer could potentially obtain lower-cost financing than is available on the public market.
Consider this simplified example. Let’s say that a couple is in the market for a $400,000 home and has 10% of the purchase price to use as a down payment, so they’ll need a $360,000 mortgage. At a 6.5% interest rate, they would pay $2,275 per month towards principal and interest on a 30-year mortgage, or $819,000 over the term of a 30-year loan.
On the other hand, if they could find an assumable loan with a 3.5% interest rate, a $360,000 remaining balance, and 20 years remaining on the term, their monthly principal and interest payment would be about $2,088. Not only would their total house payments total just $501,120, but they would own their home free and clear 10 years sooner.
Assuming a mortgage can also save the buyer significant amounts of money when it comes to fees and closing costs. To be clear, there are costs involved with mortgage assumption, but they are typically much lower than obtaining a new mortgage. For example, USDA loans typically have closing costs no greater than one-third that of a new mortgage. VA loans typically require a funding fee equal to 1.25% to 2.15% of the loan amount, but this is just 0.5% for mortgage assumption.
What it could mean to you
Of course, every circumstance is different and there is a lot that determines how attractive your home might be to potential buyers. But in many cases, having an assumable mortgage can be a big selling point that you may want to take advantage of when it comes time to sell.
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