Assumable mortgage refers to a type of financing agreement where the current owner of a property transfers the outstanding mortgage, including the relevant terms to a buyer. The new buyer is then able to avoid getting a new mortgage by assuming the remaining debt of the previous owner.
Therefore, the buyer is allowed to take over the loan of a seller on the home being purchased. Lender permission is required and the agreement usually carries no changes to its current terms, especially the interest rate as it applies to the mortgage.
It should be noted that not all loans fall under assumable mortgage however. Generally, only specific FHA and VA loans are assumable. By assuming a mortgage, the buyer makes a commitment to make all future payments on the loan just like if they originally took out the loan.
Generally, potential property investors are attracted to homes with pre-existing assumable mortgages, especially in periods of increasing interest rates. This occurs because assuming the seller’s mortgage which was created at a time of lower interest rates will be useful for financing their purchase.
However, there are cases where the purchase price on the home is greater than the mortgage balance with a significant difference. The buyer will then either have to provide a substantial down payment, or agree on a new mortgage plan.
Buying a new real property is a seriously expensive project and more often than not, some form of financing is needed to successfully make a purchase. In a typical manner, the intending buyer goes to the bank to request for a mortgage in order to make the acquisition. Assumable mortgage however provide an effective substitute to the conventional method of getting a loan from the bank. Using assumable mortgage, the buyer can take over the current mortgage of the home seller if the mortgage lender approves of such transaction.
The party that benefits the most from an assumable mortgage transaction is the home buyer. Especially is the rates of interest since the seller took out the original mortgage have risen considerably. This is because the cost of borrowing increases as interest rates rise. Because interest rates of the assumable mortgage do not change when purchased from the seller, the buyer will only pay the low interest rate and not the more expensive current rate of interest. However, the assumable interest may not cover the full cost of the home, and making a down payment on the balance may require additional financing.
Using a basic example, if the seller has only an assumable mortgage amount of £90,000 but wants to sell the home for £130,000, an additional £40,000 will have to be provided by the buyer to successfully purchase the home. Therefore, only £90,000 of the total purchase price for the house can be assumed by the buyer and the remaining cost may have to be borrowed. This means that the buyer might find it impossible to get a fresh loan at the same interest rate as the assumable mortgage, even if he is buying from the same lender. Current market conditions and the buyer’s credit risk will influence the terms of the new loan.
Assumable mortgage a peculiar risk for sellers because they can be held liable for the loan if the buyer defaults. In such situation, the seller could be held responsible for whatever the lender is unable to recover from the buyer. This risk is avoided when sellers write an official release of their liability at the time of the mortgage assumption.
Both buyers and sellers enjoy some advantages during the process of assumable mortgage and purchasing the seller’s loan. The benefits are even higher if the interest rate on the mortgage is a lot lower than what currently applies in the market, or much lower than the rate the buyer is qualified for based on his credit history.
Therefore, the benefits of assumable mortgage generally derive from the ability of the buyer to work with the assumed mortgage rate, which is typically lower than prevalent market rates. Moreover, the home buyer can avoid certain settlement costs with an assumable mortgage.
There are specific ways in which a home seller can benefit from an assumable mortgage. Assumable mortgage grants the seller the opportunity to place a higher cost on his or her home, require payments from the buyer for incurred costs from closing or demand payment in cash for an equal part of the buyer’s savings over an arranged period of time.
In addition, as long as the mortgage lender gives credit approval to the buyer, VA and FHA loans may be assumed as well. The lender will first determine if the buyer is credit-worthy before agreeing to the buyer carrying assumable mortgage on the property concerned. In such cases of assumable mortgage, the seller will not be entitled to any of the accrued profits, while the buyer will be required to pay additional fees to the VA or the FHA.
Sometimes, a second mortgage is necessary to be taken out by the home buyer who assumes a mortgage on a property. Also, a hefty amount of cash might be required if the worth of the home to be purchased is greater than the remaining mortgage the seller has on the home.
If for instance, the home is being sold for £200,000 with a leftover mortgage of £50,000, the buyer will have to provide an additional £150,000 in order to completely balance the payment. The buyer’s options will then be to either pay up the balance in cash or go to a mortgage lender for the difference.
However, the benefit of assumable mortgage is significantly reduced by taking out another loan. A legal complication could result from the buyer defaulting on either of the loans from the mortgage lenders. Taking out a new mortgage lender could complicate the transaction as there could be very little cooperation between both mortgage lenders.
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