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An assumable loan allows a home buyer to take over the seller’s existing mortgage, including its outstanding balance, interest rate, and repayment term, rather than obtaining a new loan. The buyer must qualify for the loan by meeting the lender’s credit, income, and asset requirements. If approved, the buyer pays the seller for any home equity as a down payment and assumes the monthly mortgage payments.
Positives
Reasonable Interest Rate: The most advantageous benefit is to secure a lower interest rate than what’s currently available. If the seller’s interest rate is lower than the prevailing rates, the buyer will save a lot of money over the life of the loan.
Lower Closing Costs: Since the buyer is taking over an existing mortgage, there are fewer fees and paperwork involved compared to obtaining a brand-new loan.
Faster and Easier Qualification: Assuming a mortgage may be a more accessible option for buyers who may not meet the stringent credit or income requirements associated with obtaining a new mortgage. As long as the buyer meets the lender’s criteria and is approved for the assumption, they can acquire the property without needing to qualify for a new loan. This process is often more streamlined and requires less paperwork.
Easier Sale & Higher Prices for Sellers: In a market where rates are 22-year highs, there can be buyer hesitation. Being able to offer a significantly lower rate to buyers can be extremely attractive and help a seller tempt buyers to choose your home over another. Because the seller is endowing the buyer with such a low rate, they can demand a higher sale price.
Negatives
Large Down Payment: Rising home values can affect the advantages of a mortgage assumption. When a buyer assumes a mortgage, they inherit the low rate and low payment, but they must make up the difference between the home’s purchase price and the remaining mortgage balance. If the seller has significant equity, the buyer may need to make a sizeable down payment or obtain a second loan to cover the difference. This can nullify some of the benefits of the lower interest rate.
Increased Financial Risk: Sellers are often at a higher financial risk with an assumable mortgage, especially one that involves a VA loan. If the lender does not release the original borrower from liability of the mortgage, any missed payments could affect the sellers.
The Bottom Line: With an assumable mortgage, there is the potential issue that the buyer must still qualify. The lender will review credit, income, and assets to make sure payments are affordable. It can be more complicated than a traditional mortgage. It’s important to compare the costs of assuming a loan to obtaining a new mortgage. There are cases where, even with higher interest rates, it may be more affordable for the buyer to get a new loan due to lower upfront costs and down payment. A good realtor and mortgage professional will be able to help you evaluate the options.