As interest rates begin to move upwards, it may make sense for buyers to look into assuming the mortgage on the home they are buying. What happens in an assumption is that you take over all the terms, including the current balance, rate and payment, on the seller’s mortgage on the property. You still have to qualify for the loan with the existing lender.
Benefits of Assumptions
There are two main reasons why an assumption would make sense. The first is the interest rate. Suppose the seller obtained their mortgage when 30-year fixed rates were at 3.5 percent. If current market rates for a 30-year fixed mortgage are at 4.5 percent, you would be getting a below market rate by assuming the seller’s loan. The second reason for an assumption would be if the seller has very little or no equity in the home. Especially if they bought at the peak of the market, they may now have an attractive mortgage for close to the full amount of what they are asking for the property. Assuming their mortgage could allow you to buy the home with little or no down payment, without the expensive mortgage that often goes along with such a purchase.
Fees on Assumptions
Assumption fees are much lower than fees on a standard mortgage loan. The lender will charge you for their incidental costs, including credit report, flood zone search, title and escrow (if applicable), and recording. Though title and escrow charges can vary quite a bit by state, the total of these fees will likely be less than $1,000, and almost always under $1,500. In addition to these incidental costs, the lender is allowed to charge a flat “assumption fee” for their services. If the loan in question is a government loan (FHA or VA), the lender is limited to what they can charge. The maximum allowed assumption fee for FHA is $500, and for VA it is $300. For conventional loans, or loans held in a lender’s portfolio, the lender can set its own assumption fee, but it will usually be in the range of $800 to $1,000, or in some cases 1 percent of the loan amount. This is still cheaper than a brand new mortgage.
Other Costs to Consider
When budgeting to buy a home using an assumption, the lender’s charges are only one piece of the puzzle. To establish your budget, remember that your down payment will be the difference between the purchase price and the current principal balance of the underlying loan. No additional funds can be rolled in. You may also want to pay for a home inspection and an appraisal. An appraisal is not usually required by the lender on an assumption, but it might be in your best interest, to make sure you're paying a fair price for the home.
Challenges and Qualification
Not all loans are assumable. Government loans (FHA and VA) are almost always assumable by a new owner occupant. Conventional loans (Fannie Mae and Freddie Mac) have stricter guidelines; sometimes they are only assumable by a family member. Loans held in bank portfolios are typically assumable at the lender’s discretion. If in doubt, ask the seller or the lender if you can see the original loan note to check for an assumption clause. The note clearly outlines the assumability and terms. If the loan is assumable, you will have to qualify for the mortgage based on your income and credit, the same as if you were applying for a brand new loan. The lender is under no obligation to approve your assumption application.
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