First thing’s first: what is an assumable mortgage, anyway? An assumable mortgage is a housing loan that transfers from the current owner to a new buyer.
As a buyer, why would you want to take on someone else's debt? First, it avoids the headache — and costs — of having to take out a new loan with the bank.
In a market with rising interest rates (i.e. the current market in the US), assuming a mortgage allows you to take on someone else's loan at a lower interest rate, potentially saving you thousands of dollars over the course of that loan.
For example, let's say you're on the market for a duplex in Arizona, and you find one worth $300,000. The previous owner took out an assumable mortgage with a private lender. His interest rate was 4.2%. There's still $250,000 left on the mortgage.
Since you've been saving up for a while, you're able to provide a $50,000 down payment. This way you'll just assume the previous owner's mortgage, saving you time and money.
How Do I Assume a Mortgage?
Step 1: Figure Out Whether or Not It's Even Possible
Many mortgage lenders won't allow new homebuyers to assume a mortgage.
The most popular types of assumable mortgages are FHA (Federal Housing Administration), VA (Veterans Affairs), and bank portfolio loans (when a bank keeps the house in its own portfolio).
A couple things will make it more likely for a conventional lender to allow a homebuyer to assume a mortgage.
First, if the current owner is starting to default on payments. Second, if the potential homebuyer is able to produce a significant down payment.
Conventional lenders typically don't like to work with more lending institutions. They want to keep it as simple as possible.
Step 2: Compare Interest Rates
Does assuming the mortgage make financial sense? Remember: when assuming a mortgage, you assume the previous owner's interest rate.
While interest rates typically rise over time, that doesn't make it impossible for you to get a better deal than the previous owner. This is especially true if you have a good credit score.
Explore your options by talking with different banks in your area.
Note: Buyers should always discuss financing options with their real estate agent.
Step 3: Figure Out Your Down Payment
In order to assume the mortgage, you need to know how much equity the owner has built in the house.
Using our Arizona duplex example from before, if the owner has a mortgage with $250k on it and he's selling the property for $300k, you'll need to provide a down payment of $50k if you want to take on the rest of the loan.
Otherwise, you're going to need to take out a second mortgage in order to cover those costs. That takes us to the next step.
Step 4: Find Financing
It might be easiest to check with the original lender to see whether or not they will allow you to take on a second mortgage, but if you can, shop around the area to figure out a way to secure the money that you need to cover the equity that the homeowner has already built.
Step 5: Obtain Permission from the Lender
The lender needs to approve any and all mortgage loan assumptions. Without the lender's approval, there's no moving forward.
Step 6: Provide Your Own Financial Information
The lender will want to see your income history and proof of assets. Banks don't give away free money.
They want to make sure that you have some form of collateral in case you default on the loan. It's their own form of insurance.
Be prepared to provide W2s going back at least a few years, as well as the value of your savings accounts, retirement accounts, car(s), and any other valuable assets that make up your net worth.
Step 7: Finish the Application Process
Conventional lenders will demand you fill out an application with the lender, a real estate agent agreement, paperwork with the title company, and any other necessary forms.
Step 8: More Paperwork
The Real Estate Settlement Procedures Act requires you to fill out and answer forms related to your loan. They will send you this in the mail. Simply answer the questions and ship it back.
Step 9: Sign the Assumption Agreement
This is the real deal. Finally, this is the agreement that confirms your ownership of the terms of the previous loan.
Warning: If you're a seller, make sure that your real estate agent has a liability release form. If this isn't filled out and the new mortgage owner starts defaulting on payments, the lender can go after the previous mortgage holder as well, even if he or she hadn't owned the property in years.
Step 10: Closing
Whenever a house sells, there's typically a closing period where all the remaining documents are signed and finalized. Congratulations! You have successfully assumed a mortgage.
Still Have Questions?
Applying for a mortgage — and buying a house, in general — is a complicated endeavour in its own right. Throwing an assumable mortgage into the mix only adds to the complexity.
Regardless of your level of experience with real estate, an experienced buyer’s agent is an invaluable resource.
Agents can provide guidance on on every aspect of the home-buying process, including house hunting, securing financing, making an offer, negotiating on price, and closing.
What’s more, when you find your agent through Clever Real Estate, you not only get access to full-service agents from major brands and brokerages like Keller Williams, Century 21, RE/MAX, and more — you can also quality for a Home Buyer Rebate that puts up to 1% of the final sale price back in your pocket after closing.
Fill out our online form to learn more and get connected with a top-rated buyer’s agent near you.