Think back to the last time you made an assumption. Maybe it was at work with your boss or at home with your spouse. In any case, you assumed something to be true rather than seek clarification.
You can find yourself in quite a predicament when you assume. But when we’re discussing home loans, an assumption turns out to be a positive thing. Let’s dive into the ins and outs of a mortgage assumption agreement.
What is a mortgage assumption agreement?
It’s actually pretty self-explanatory. A person who assumes a mortgage takes over a payment from the previous homeowner. Basically, the agreement shifts the financial responsibility of the loan to a different borrower.
Consider the following scenario. You’re interested in buying a home yet want to avoid obtaining an entirely new loan. As long as you understand that you’ll be on the hook for someone else’s debt, a mortgage assumption agreement could be a viable option.
Now for the follow-up question: Why would you decide to assume a home loan instead of getting your own mortgage?
It really depends on the situation. If rates are unfavorable for buyers and the current homeowner has a significantly better rate, then it makes sense to explore a mortgage assumption. Just know that only certain loans are assumable and that you will need to learn about restrictions.
How long does it take?
By no means is mortgage assumption an easy process. You’ll be asked to provide extensive documentation, much like you would when securing financing the traditional way. That’s why it’s important to have copies of pay stubs and W-2’s ready ahead of time.
Keep in mind that the average loan assumption takes anywhere from 45-90 days to complete. The more issues there are with underwriting, the longer you’ll have to wait to finalize your agreement. Do yourself a favor and get the necessary criteria organized in advance.
How to assume a mortgage from a family member
Say one of your family members plans to move into a larger house in the near future. Knowing you’re in the market for your own place, they ask you about assuming their mortgage. Here’s what you should do before accepting their offer.
Confirm the type of mortgage they have
As we mentioned earlier, not all home loans are assumable. The good news is that conventional and government-backed loans, such as FHA, VA, and USDA, allow for transfers between borrowers. Other mortgages require the seller to pay off the loan when they hand over the property.
Have enough saved for a down payment
While you may not have to worry about closing costs with a mortgage assumption, you’ll still have to come up with a down payment. These funds essentially pay off the original borrower’s equity. So if the seller previously took out a $300,000 loan and has since paid it down to $250,000, you would pay them $50,000 in cash for their equity.
See if you benefit from a refinance
Not exactly thrilled with the terms of your family member’s loan? You could refinance and enjoy significant savings if you have your credit in order. What’s more, today’s mortgage rates are some of the lowest we’ve ever seen.
Does it hurt your credit?
We should mention that the seller’s payment and credit history have no impact on this transaction. That said, be prepared for a lender to check your credit score and employment status. Doing so helps them determine if you are, in fact, able to assume the mortgage.
Pros and cons
Not all aspiring homeowners should opt for a mortgage assumption. Be sure to familiarize yourself with the advantages and disadvantages before making a decision.
Pros
Possible lower rate - A lower interest rate could save you hundreds of dollars a month or more. It’s why many hopeful buyers jump at the chance to assume a loan that was originated in a low-rate environment.
Pay less in closing costs - We touched on this earlier. Since you won’t need a lender to generate a new loan, you won’t have to worry about typical underwriting fees.
Smaller mortgage amount - Not sure you can stomach a 30-year mortgage but don’t earn enough income to manage a 15-year mortgage? You’ll likely find yourself somewhere in between when you take on another person’s loan. This potentially translates to fewer payments and less of your hard-earned money going toward interest.
Cons
Higher down payment - This is the biggest drawback when entering into a mortgage assumption agreement. With home prices continuing to rise, equity amounts are at all-time highs. Unless you have a sizable savings account, your best bet may be to research down payment assistance programs for your own home loan.
FAQs
How Does An Assumable Loan Work? To assume a loan, you must qualify with the lender. If the price of the house exceeds the remaining mortgage, you must remit a down payment worth the difference between the sale price and the mortgage. If the difference is substantial, the buyer may need to secure a second mortgage.
What is the process for assuming a mortgage? ›
How to get an assumable mortgage
- STEP 1: Find homes.
- STEP 2: Confirm eligibility.
- STEP 3: Provide documentation.
- STEP 4: Pay closing costs and down payment.
- STEP 5: Sign the promissory note.
You can only assume a government-backed loan, such as an FHA or VA loan. Most conventional mortgages aren't assumable. Some borrowers seek out assumable mortgages in order to get a better interest rate than what's on the market today. An assumable loan can be tough to find, however.
Do I have to go with the same lender when assuming a loan? ›
Note, however, that your second mortgage will likely come from a different lender than the one that owns the mortgage you're assuming. So you have to work with the current mortgage lender and make sure it's willing to play ball. You'll also likely need a credit score of 680 or higher to qualify for a home equity loan.
What is the fee to assume a mortgage? ›
The exact amount of the assumption fee can vary depending on the lender and the specific mortgage being assumed, but it typically falls in the range of 0.5% to 1% of the loan amount. For example, if a mortgage being assumed has an outstanding balance of $300,000, the assumption fee could range from $1,500 to $3,000.
Do you need money down to assume a mortgage? ›
To assume a loan, you must qualify with the lender. If the price of the house exceeds the remaining mortgage, you must remit a down payment worth the difference between the sale price and the mortgage. If the difference is substantial, the buyer may need to secure a second mortgage.
How long does it take to do an assumable mortgage? ›
You'll be asked to provide extensive documentation, much like you would when securing financing the traditional way. That's why it's important to have copies of pay stubs and W-2's ready ahead of time. Keep in mind that the average loan assumption takes anywhere from 45-90 days to complete.
What credit score do you need for an assumable mortgage? ›
FHA assumable mortgage
In most cases, this means at least a 580 credit score and a debt-to-income ratio of 43% or lower.
Is it worth it to assume a mortgage? ›
Key Takeaways. Assumable mortgage benefits can have a better interest rate for the buyer than the market rates. For the seller, an assumable mortgage helps them avoid settlement costs. Generally, most mortgages are no longer assumable.
Do banks allow you to assume a mortgage? ›
A home loan assumption allows you as the buyer to accept responsibility for an existing debt secured by a mortgage on the home you're buying. The two processes available to suit your needs are Qualified Assumptions, and the Name Change and Title Transfer Requests.
The Drawbacks of Mortgage Assumption
In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties' credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.
How to remove someone from a mortgage without refinancing? ›
The main ways to remove a name from a mortgage without having to refinance include:
- A loan assumption.
- A loan modification.
- A cosigner release.
- A quitclaim deed.
- Sell your home.
- Pay off your home.
In theory, mortgage loan assumption is the simplest solution of all. That's because it doesn't require refinancing your mortgage. You inform your lender that you are taking over the mortgage and want a loan assumption.
Do you need a credit check to assume a mortgage? ›
To qualify for an assumable mortgage, lenders will check a buyer's credit score and debt-to-income ratio to see if they meet minimum requirements. Additional information such as employment history, explanations of income for each applicant, and asset verification for a down payment may be needed to process the loan.
Do you need an appraisal to assume a mortgage? ›
In many cases, the closing costs on an assumed mortgage are lower than they'd be on a conventional loan — an appraisal is typically not required, and the FHA, VA and USDA place caps on some fees for assumed loans.
How does assuming a mortgage affect your taxes? ›
According to Green, “There is no difference tax-wise for the seller when their mortgage is assumed.” This simplicity can make assuming a mortgage an attractive option for sellers looking to transfer property without altering their tax circ*mstances.
How does assuming a mortgage benefit the seller? ›
Assumable mortgage benefits can have a better interest rate for the buyer than the market rates. For the seller, an assumable mortgage helps them avoid settlement costs. Generally, most mortgages are no longer assumable. Some USDA, VA, and FHA loans may be assumable if they meet certain criteria.
How does assuming a mortgage affect credit score? ›
In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties' credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.
What clause prevents a buyer from assuming the mortgage? ›
This clause also necessitates that the borrower notify the lender before transferring or assigning the mortgage to anyone else. Most importantly, an alienation clause prevents a homebuyer from assuming the current mortgage on the property.
How to assume a mortgage from a family member? ›
How To Assume A Mortgage
- Ask The Lender If The Mortgage Is Assumable. The current mortgage's original lender has to approve the new buyer before it will sign off on the assumption. ...
- Make Sure You Can Cover The Upfront Costs. ...
- Submit Your Mortgage Loan Assumption Application. ...
- Complete The Underwriting Process.
