With the increase in mortgage interest rates, some borrowers are asking about a little-known feature on certain mortgage loans. Assumability. What this means is that home-buyers that are lined up with sellers with an existing assumable loan, can buy the home and take over their current interest rate and payment.
Existing FHA mortgage with 3.75% interest rate
Takes over FHA mortgage with 3.75% interest rate
In markets where rates have significantly increased over a short period of time, this would allow a home buyer to get a lower rate than what is currently available in the market.
Sounds interesting, right? But there are catches. A lot of them.
First off, assumable mortgages are only available on government products like FHA, VA, and USDA. Since the most popular mortgage type for the past few decades has been conventional loans, this limits the pool a bit when looking for a seller that is currently in an assumable loan.
Second, any difference between the sales price and the current loan balance is due at the time of closing. So if a seller has an FHA loan with a balance of $400,000 but is selling their home based on a market value of $475,000 - any buyer interested in assuming this loan would need to come up with $75,000 at closing, plus any applicable closing costs.
Sales price - $475,000
Current loan balance - $400,000
Due at closing - $75,000 + closing costs
Third, in most cases, borrowers looking to take on an assumable loan must go through the seller's current lender. Basically, you can’t use your trusted loan advisor to help you with the mortgage process, and instead must be willing to work directly with whichever lender or loan servicing company holds the rights to the existing mortgage loan.
Fourth, borrowers must still meet the typical mortgage approval requirements for credit, income, job history, assets, etc. On top of that, each government program, FHA/VA/USDA has specific criteria that must be met as well. For instance - USDA loans have a separate eligibility requirement that limits the amount of income the borrower can earn in order to qualify. And with the exception of VA, all government loans require some form of mortgage insurance, usually for the life of the loan. This can factor in when looking at approval requirements. Along with the fact that, regardless of the down payment amount, that extra mortgage insurance is still tacked into the loan payment.
Though assumable mortgage loans are getting some extra attention due to the high-interest rate atmosphere we are experiencing right now, there is a lot to look at before moving forward with this option. But, for those home buyers that fit the criteria, it can be a way to get into a mortgage with a lower interest rate than what the market is currently offering.
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