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Assumable Mortgage
Buyers Can Assume a Mortgage Direct from Seller
An assumable mortgage is one that a buyer can take over, or assume, from the seller. This is typically an involved process, and it is not necessarily possible, depending on the situation; but it can be an excellent benefit to sellers and buyers.
When you take over an assumable loan, you get the same interest rate, repayment period, balance and other terms instead of getting a new mortgage. In theory, any home loan can be assumed, but there are only two common types of loans that allow this: VA loans and FHA loans. Most conventional loans cannot be assumed by a new borrower.
In many cases, depending on current interest rates, assuming an existing loan can pay off for the buyer with fewer costs and a lower mortgage payment.
Qualifications Required for Assumable Loans
You will need to meet the same qualifications to take over a loan as you would to get your own mortgage.
This means we will check your credit, assets, and income to make sure you can afford to repay the loan.
You Pay the Seller Instead of Making a Down Payment
If you choose to get a new loan, you will typically be required to make a down payment of 3.5 to 20 percent or more. When you assume a loan, you do not have to make a down payment.
Instead, you pay the seller compensation for the equity they have built in the home, or the difference between their mortgage balance and what the home is worth.
Full Loan Cost May Not Be Covered
When you assume a loan, the mortgage may not cover the cost of the home. This means you may need additional financing or a down payment, along with the payment you make to the seller.
Seller's Liability Release
Sellers also enjoy advantages when a buyer takes over their loan. The property can be more attractive to buyers if the mortgage has an interest rate lower than current rates, or if the seller has built very little equity that must be paid to him or her. There can be a big catch to assumable loans: The seller can still be responsible for the debt, even after the buyer assumes the loan, if the lender does not release the original borrower.
Assumable VA Loans
VA loans are always assumable, as military members often need to relocate. The catch, however, is that VA loans are associated with the veteran's entitlement. The seller's entitlement can remain attached to the mortgage if the buyer is not also a veteran or lacks his or her own entitlement. This is important to understand, as it will keep sellers from using their own entitlement again to get a new mortgage.
If this entitlement stays on the loan and the new borrower defaults, the seller may have difficulty using his or her VA entitlement in the future.
Should You Assume a Loan?
The answer to this depends. A buyer will enjoy the greatest advantage if the seller's loan has more attractive terms than are typical at the time. For example, the interest rate can be significantly lower than current average rates, potentially saving buyers hundreds of dollars a month on their mortgage payment.
Assuming a loan is usually a good deal if the buyer does not need to pay more than 10 to 20 percent of the purchase price, in cash, to the seller.
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