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What Is an Assumable Mortgage, And Is It Right for You?

An assumable mortgage allows a buyer to take over the seller’s mortgage loan. One of the main reasons why people choose to use this type of mortgage is to take advantage of lower interest rates if the market conditions improve.

When buying a house, you usually choose a lender who will give you a new mortgage. However, in some cases, you can also acquire the property by taking over the existing mortgage. This method would involve taking on the seller’s remaining mortgage balance. An assumable mortgage allows a person to purchase a house and take over the seller’s existing loan without getting a new mortgage. It eliminates the need for a new loan and allows the buyer to keep the same terms and interest rate. The remaining balance, the interest rate, and other loan terms stay the same. 

Many people hoping to become homeowners face a tough time due to rising mortgage rates. Right now, the rates are at their highest level since 2001. It is a frightening situation for many people who are planning on buying a home. However, loan assumption can be an excellent alternative for those struggling with the high-interest rate. It can allow them to lower their monthly payments even as the housing market goes up. 

An assumable mortgage is a type of loan obtained in a high-interest-rate environment. However, the advantages of this type of loan are limited to the amount of the loan’s existing mortgage balance and the home equity. If the home price is $250,000 and the assumable mortgage has a balance of $110,000, the buyer will need to make a down payment of $140,000 to cover the difference. Or, they may need to secure a separate mortgage to cover the additional funds. If you need more information about this type of mortgage contact us, we are experienced Nashville home buyers and we buy houses in Nashville.

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How Does The Assumable Mortgage Work?

Although a mortgage assumption can allow a person to take on the original loan amount, it’s important to note that this method doesn’t consider the property’s equity. If the house’s value has increased since the original loan gets issued, and the buyer still needs to cover the difference, they can use cash or another loan. A home equity loan is a type of the second mortgage that allows people who cannot put down a considerable amount of money to cover the equity in their property. Although it will have higher interest rates, the principal amount will be lower than a traditional first mortgage requires. 

A homebuyer usually takes a mortgage from a financial institution to purchase a property or home. The contract for repayment includes the interest and principal payments, and the borrower must pay both of these components. If homeowners sell their homes later, they can transfer their mortgage to the new owner—assumable mortgage. 

With an assumable mortgage, a homebuyer can assume the terms of the mortgage, such as the interest rate, principal balance, and repayment period. This type of loan eliminates the need for a home loan and allows a buyer to take over a mortgage without going through the bank’s rigorous process. 

If the current interest rate is higher than the assumable loan’s, it could lead to a cost-saving opportunity. Rising interest rates can cause the cost of borrowing to increase, affecting home loan affordability. With an assumable mortgage, the interest rate is likely to be lower, making it an attractive option for buyers. Rising interest rates will not affect an assumable mortgage with a locked-in rate. A mortgage calculator can help you budget for the monthly payment.

Types Of Mortgage Assumption

Novation and simple assumption are the two types of mortgage assumption. These two types of loans have varying implications for the relationship between the seller, buyer, and lender. A simple assumption is the mortgage transfer from the seller to the buyer. Since the mortgage lender is not privy to this transfer, it doesn’t perform the underwriting process on the buyer. It means that both the seller and the buyer are liable if the latter fails to make the required payments. 

In novation, the lender agrees to transfer the liability from the seller to the new buyer. Since the buyer goes through the underwriting process, the mortgage lender will release the seller from any future responsibility regarding the payments. 

What Are The Loan Types That Are Assumable?

Some of the most common types of mortgages that are assumable are those offered by the USDA, VA, and FHA. If a buyer wants to take on a mortgage from a seller, they must meet specific requirements to receive approval.

The Veterans Affairs (VA) Loans

A military member or spouse must meet specific requirements to qualify for a VA loan. However, this doesn’t mean they need to be a military member to take advantage of the program. In most cases, the regional loan office and the lender still need to approve the loan assumption. Buyers who took out a mortgage before March 1, 1988, can assume the loan regardless of the lender’s approval. It means that they don’t need to meet the requirements of the VA or the lender.

United States Development Of Agriculture (USDA) Loans

Rural property buyers can take advantage of USDA loans, which typically have low-interest rates and require no down payment. To be eligible for a USDA loan, the buyer must meet various requirements, such as having a credit and income background and receiving approval to transfer the title. The buyer can also assume the existing loan rate and terms or the new or existing loan terms and conditions. The mortgage can only get taken if the seller pays on time. 

Federal Housing Authority (FHA) Loans

When both parties involved in the transaction meet the necessary requirements, assumable loans can be issued by the FHA. For instance, if the property is used as the seller’s primary residence, then the loan can be assumable. To be eligible for an FHA loan, the buyer must first verify that the program is assumable and that they meet the various requirements. If the loan is approved, the buyer will assume the mortgage. However, the seller still has to be released from the loan.


Jonathan Sims

Jonathan Sims is a cash home buyer and the founder of Olive Tree Homes. With a passion for helping homeowners in need, he has helped countless individuals and families sell their homes quickly and hassle-free. As an expert in the real estate industry, Jonathan has a deep understanding of the local market and uses his knowledge to make fair and honest offers on homes. He believes in providing excellent customer service and making the home selling process as easy as possible for his clients. Jonathan is committed to helping people achieve their real estate goals and has a proven track record of success in the industry.