Are your home buyers understandably frustrated with the high-interest rates on mortgages in today’s market? There might be a way to secure a more favorable rate: assumable mortgages. These mortgages allow buyers to take over a seller’s existing mortgage, often at a lower rate than currently available. Here’s a guide to understanding and advising your clients on assumable mortgages.
What is an Assumable Mortgage?
Assumable mortgages are loans that can be transferred from the seller to the buyer. They are typically associated with government-backed loans, such as those insured by the Federal Housing Administration (FHA), the Veterans Administration (VA), or the United States Department of Agriculture (USDA). Private, non-government-backed loans are usually not assumable.
When they assume a mortgage, buyers take over the original mortgage’s remaining balance, repayment schedule, and interest rate. This can be beneficial if the interest rate on the assumable mortgage is lower than current market rates.
How Assumption Works
To assume a mortgage, the buyer negotiates the home’s purchase with the seller as usual. They will also need to complete a mortgage application with the lender holding the assumable loan. While a buyer must meet standard qualification requirements, some criteria required for the original mortgage may not apply. For example, they don’t need to be a veteran to assume a VA loan.
Assumable loans often have lower closing costs than conventional loans and may not require an appraisal, saving money. If the seller wants to sell the home for more than the mortgage balance, the buyer must negotiate that additional amount. This can be paid in cash, through a second mortgage, or a combination of both.
Finding Homes with Assumable Mortgages
You can assist your buyers in finding homes with assumable mortgages by searching the Multiple Listing Service (MLS) and other portals. Sellers with assumable loans often highlight this in their property listings. Homes owned by distressed sellers in pre-foreclosure may also have assumable mortgages, presenting an opportunity to negotiate a favorable deal.
Considerations for FHA Loans
It’s important to note that FHA loans require a monthly fee called a Mortgage Insurance Premium (MIP) for the life of the loan. This fee can only be stopped by refinancing the mortgage.
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