In life, we are always going to have to make some compromises, and buying a home is no exception. Whenever you find a home for sale that meets all of your needs, you’re going to want to compromise on cosmetic things. However, what about the mortgage terms? What happens when you get involved with an assumable mortgage: meaning you are paying down the amount owed on the home by the previous owner, according to the mortgage’s original terms.
In an environment where the interest rate is rising consistently, taking on an assumable mortgage might seem like an appealing avenue to explore. Scoring a mortgage with a locked-in lower rate than the current market can dramatically decrease how much you’d pay for the home. However, those who buy into an assumable mortgage do so for other reasons, as well.
Here are some things you’ll need to consider before you decide to go this unusual route for purchasing a home.
1. Not All Mortgages are Able to Become an Assumable Mortgage
Assumable mortgages aren’t as common today as they once were, thanks to stricter regulations and an ever evolving mortgage economy. There are some regular loans that have an assumable mortgage clause built it, but this can usually only be found in Federal Housing Administration (FHA) and Veterans Affairs (VA) loans. You can figure out if a loan can become assumable when you look through the paperwork.
2.The Date and Loan Type Does Matter
To assume an FHA loan, you have to look at the original date of the loan. If the loan originated before December 1, 1985, then it can be finished under the “Simple Assumption process” without a mandatory credit check or approval from the lender. If it was created after that date, then you will have to follow the “Creditworthiness Assumption process,” which the buyer must qualify for and get approval from the lender.
3. Not Every Mortgage Environment is Equal
One of the more beneficial reasons for getting an assumable mortgage is that you have the ability to get terms that are uncommon in today’s economy. However, since interest rates are incredibly low, historically low in fact, there is a slim chance that you will find a mortgage with an interest rate lower than what is offered now.
4. A Few Positives for Both Buyers and Sellers
With an assumable mortgage, the buyer will have to pay for the amount of equity the seller put into the house. If there isn’t much equity, the buyer could have a very minimal upfront costs. Sometimes closing costs can be avoided with an assumable mortgage, and the buyer can avoid the appraisal requirement. Also, if you’ve got a VA loan, you could receive the highest terms without being a veteran.
For sellers, an assumable mortgage means they could have incredibly mortgage terms. This perk can also be a great selling point and could even charge a higher fee or negotiate that the buyer pays closing costs. This is also a great option if the seller is having difficulty paying their mortgage. They can get out of the contract without the harsh effects of a foreclosure.