Does taking over someone’s mortgage seem easier than getting your own mortgage? You might be in for a little surprise. Today, an assumable mortgage still requires approval, just like you would need if you took out your own mortgage.
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There are benefits of assuming someone’s mortgage, though, especially if interest rates are higher now than the rate the seller has on their mortgage. Before you think you can assume a seller’s loan, though, you must learn the particulars.
THE LOAN MUST BE ASSUMABLE
First, not many loans are assumable. Conventional loans never had this option. The two loan programs that offer assumptions are VA loans and FHA loans, but not all of them can be assumed. It’s up to the lender. If you are looking for the language in your mortgage to determine if your loan can be assumed, look for a ‘due on sale’ clause in the mortgage. If that exists, your loan is not assumable. If there isn’t a due on sale clause, it may be assumed upon lender approval.
LEARN THE REQUIREMENTS
If you find an assumable loan, your first step is to contact the lender. There aren’t blanket guidelines that fit all loans that you want to assume. The lender will make their own requirements. When you contact the lender, ask them for their assumption requirements.
Some of the most common requirements include:
- Proof of income
- Proof of assets
- Good credit score
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Basically, the lender needs to make sure you can afford the loan payments. They will evaluate the loan much like they would evaluate a purchase loan. They may require a down payment, it depends on the lender. For example, an FHA lender may require you to put down 3.5% of the balance of the loan. This gives you a little ‘skin in the game’ and reassures the lender that you will make your payments.
DETERMINE IF YOU CAN AFFORD IT
The final step is to come up with the money to pay the seller. Even though you are assuming his loan, he still needs to be paid the equity that he has in the home. Here’s an example:
The seller owes $100,000 on a home that’s worth $200,000. You agree to buy the home for $200,000 and want to assume his loan because it has an attractive interest rate. That takes care of the outstanding loan balance for the seller, but there’s still the matter of the equity he has in the home. In a traditional purchase where you secure your own financing, the lender would pay off the seller’s loan and give the lender the remaining proceeds. Since there aren’t remaining proceeds in an assumption, it’s up to you to pay the seller. In this case, you’d need $100,000 to pay the seller, plus the cost of the closing costs.
If you do have the money to make this transaction happen, you’ll have to verify the assets. The lender will need to make sure the money is yours and that it’s seasoned (in your account for at least 2 months). If you borrow the money in any type of loan whether a mortgage or otherwise, the lender will need to figure the payment into your debt ratio to make sure you can afford it.
The bottom line is that some mortgages are assumable, but finding a willing lender might be more difficult. You have to deal directly with the seller’s lender. You don’t have the option of shopping around to find a lender with the best terms and interest rates. If the lender is willing though, it can be a great way to save money on your loan.