Are you resigned to paying higher interest rates on a mortgage when shopping for a home in today’s market? You may not have to. You could buy a home with an assumable mortgage that was taken out when interest rates were lower. Here’s how assumable mortgages work.
What is an assumable loan?
Mortgage loans that the U.S. government insures are assumable. The federal agencies that back these loans are the Federal Housing Administration, the Veterans Administration, and the United States Department of Agriculture. Private mortgage lenders follow these agencies’ regulations when making loans, and in turn, the government protects the lenders in case of a default. Conventional, non-government-backed loans are not assumable.
Once you assume a mortgage, you assume the remaining amount owed, the repayment schedule, and the interest rate of the original mortgage.
How assumption works
In mortgage assumption, you negotiate the house purchase like any other. You agree with the seller to a price, earnest money amount, closing date, and other details.
You complete a mortgage application with the lender holding the assumable loan, documenting your employment and income, credit history and anything else the lender wants to see. Although you must meet standard qualification requirements like any other mortgage, some standards the seller had to meet when obtaining the mortgage don’t apply when assuming the loan. For example, you need not be a military veteran or spouse to qualify to assume a VA loan.
Assumable loans typically have lower closing costs than conventional ones and often do not require an appraisal, saving you money. Because housing prices tend to rise, the seller may want to sell the house for more than the mortgage balance to be assumed. In that case, you negotiate with the seller to determine that additional amount. You can pay it in cash, take a second mortgage for that amount, or combine the two approaches.
FHA loans require a monthly fee called a mortgage insurance premium (MIP) that is in place for the life of the loan. You can only stop paying that fee by refinancing the mortgage.
Finding homes with assumable mortgages
A professional real estate agent can search the MLS and other portals to find homes with assumable mortgages. In general, sellers with lower-interest assumable loans will note that in the property listing information. Homes owned by distressed buyers in pre-foreclosure fall into this category. These buyers are highly motivated to sell, possibly at a price low enough that the amount over the mortgage balance is very reasonable.
Related – Creative Mortgages in Times of High Interest Rates
