You've finally found the perfect place to buy. The only thing left is to pick the best mortgage loan to finalize the deal. You want a good interest rate, but you're not sure if you qualify for a new mortgage. The current owner of your dream house lists a freely assumable mortgage loan on the home advertising flier. To make your best final loan decision, you'll need to look over the terms of the buyer's current loan and shop to see if you can find better terms on a new mortgage loan.
The mortgage lender provides the cash for you to pay for your house, and the lender earns interest on the loan over the period of the loan. Qualifying loans are new loans given by the lender that require you, the buyer, to document your income and prove that you have good credit and the ability to pay the mortgage each month. You have a choice of new loans when you qualify for a new mortgage. Assumable loans are loans that were given to the current owner of your dream house. Assumable loans will also require you to qualify, but for only one loan -- the one currently on the house. Most mortgage loans, including assumable loans, offer 15- or 30-year terms with fixed or adjustable interest rates. Fixed rates don't change, but adjustable rates change periodically to readjust to new rates using a single financial index, such as the interest rate for U.S. Treasury bonds.
The mortgage lender will want to make sure you have a credit history without any dings or any major damage before they will give you either a new qualifying or the assumable mortgage loan offered by the seller of your dream home. Lenders look at your credit score to determine your credit worthiness. Your score is a number developed by credit agencies using a mathematical factoring of your current open credit accounts, your current debt, reports of on-time and late credit payments and any credit dings. The exact method for the calculations remains a mystery, but this score largely determines the banks' view of your creditworthiness for a new mortgage loan -- or if you can assume the current mortgage loan.
Mortgage lenders -- even lenders offering assumable loans -- make you qualify for your home loan. The lender looks for monthly income to cover the loan payments each month. The qualifying requirements for all types of loans vary over time and with the flexibility of the money market. Lenders for both types of loans typically look to make new and assumable loans where the borrower's home payments amount to between 28 and 35 percent of monthly take-home pay. This is known as your debt-to-income ratio.
Assumable mortgage loans were commonplace in the 1980s. The term "freely" used with an assumable loan meant new borrowers with good credit histories and qualifying incomes could simply slip into the former borrower's role in the loan -- with the same conditions, low interest rate and terms. The buyer bought out the original borrower by paying cash for the equity in the house. With the high interest rates for new loans in the 1980s, buyers looked at the assumables as a sensible alternative to qualifying for a new mortgage.
Beginning in 2009, assumable mortgages were a rare commodity on the home mortgage market. Most home loan contracts, in fact, specifically forbid the seller from transferring the loan, even if you qualify for the current loan. During times of low mortgage interest rates, you have little incentive to assume current loans when you can have your own loan for the same low monthly payment, or for a payment that is even lower.
- House and Home: Once Common, Assumable Mortgages Now Hard to Find
- CBS News: Assumable Mortgages Coming Back in Vogue
- FHA Home Loans: FHA Loans -- Income Qualifications
- Time Business: The History of American Mortgage Leading in Pretty Colors
- Federal Reserve Board: Consumer Handbook on Adjustable-Rate Mortgages
- My FICO: What's In Your Credit Score?
- My FICO: About Credit Scores
- Experian: Report Basics
Lee Grayson has worked as a freelance writer since 2000. Her articles have appeared in publications for Oxford and Harvard University presses and research publishers, including Facts On File and ABC-CLIO. Grayson holds certificates from the University of California campuses at Irvine and San Diego.