Mortgage Assumption Value: A Guide to Assumable Mortgages

Assumable mortgages can be a game-changer for homebuyers, offering a lower barrier to entry and a chance to inherit a mortgage with a good interest rate.

In an assumable mortgage, the buyer takes over the seller's existing loan, which can save them thousands of dollars in closing costs and interest payments.

The value of an assumable mortgage lies in its flexibility, allowing buyers to assume the seller's mortgage without requiring a new loan.

Assumable mortgages are typically found in areas with low interest rates, where the original borrower secured a favorable rate.

An assumable mortgage is a type of mortgage that allows a buyer to take over the seller's existing mortgage, including the interest rate, repayment period, and principal balance.

This means the buyer becomes responsible for the remaining payments on the mortgage, with the same terms as the previous homeowner.

With current mortgage rates sitting at a relatively high 7.27% for 30-year loans, an assumable mortgage can be a game-changer, offering access to lower interest rates.

Sites with listings for homes with assumable mortgages currently boast rates as low as 2%.

The buyer will still need to compensate the seller for the amount of the mortgage they've paid off, which is essentially part of the overall purchase price.

This amount can come out of the buyer's own pocket or be financed via another loan.

In addition, the buyer will likely need to pay the lender an assumption fee.

Assuming a mortgage can be a smart move for homebuyers, but it's not without its challenges. Expect closing to take up to 60 days, which can be a long time for buyers who are eager to move in.

Buyers may get a lower interest rate by assuming a loan with a better rate than what's currently available. For example, if rates were lower when the seller purchased the property, you may be able to assume a loan with a sub-3% interest rate.

However, buyers will still have to pay mortgage insurance if it's an FHA loan, which can add another $100 or $200 to the total monthly mortgage payment.

Sellers might attract more offers if a mortgage is assumable and has a lower-than-market interest rate. This can potentially command a higher sale price.

Here are some key points to consider:

Most government-backed loans, such as FHA or VA loans, are assumable, but most conventional mortgages aren’t. This means buyers have to carefully evaluate their options to determine if an assumable mortgage is right for them.

Assuming a mortgage can offer a better interest rate than what’s on the market today, which can be a significant cost savings for buyers.

FHA loans are a popular option for assumable mortgages, requiring a credit score of at least 580 in most cases.

VA loans can also be assumed, but if the loan originated after 1988, lender approval is necessary. Typically, lenders look for a credit score of 620 and above.

USDA loans are often assumed with a new rate and terms, requiring a minimum 640 credit score, but can be assumed without a credit review in some cases, like transfers between families.

Here are the main types of assumable mortgages:

FHA loans are a great option for those who want to assume a mortgage, as long as they meet the standard FHA loan requirements, which include having a credit score of at least 580 in most cases.

VA loans can be assumed without being a military member or veteran, as long as the loan originated before 1988. However, if the loan originated after 1988, the lender must approve the assumption.

USDA loans are often assumed with a new rate and terms, requiring a minimum credit score of 640. However, in some cases, like transfers between families, they can be assumed without needing an income or credit review.

These types of mortgages offer flexible assumption options, making them attractive to homebuyers and sellers.

Most conventional mortgages are not assumable, containing a due-on-sale or due-on-transfer clause that requires the mortgage to be paid in full when the original borrower sells the property or transfers the loan.

However, in special circumstances, you may be able to assume a conventional loan. To determine if a mortgage is assumable, look for an assumption clause in the mortgage contract.

Conventional mortgages that are assumable typically require the lender's approval, and the new borrower will be held to the loan's eligibility requirements.

The Garn-St. Germain Act of 1982 changed the landscape of assumable mortgages, allowing lenders to enforce due-on-sale clauses if a property changed hands.

Here are the key differences between conventional and government-backed loans when it comes to assumability:

Keep in mind that conventional mortgages are the most popular type of loan, so it's essential to understand their assumability rules before considering an assumption.

VA loans are a great option for eligible veterans, and one of their best features is that they're assumable. Loans originated before March 1, 1988, are freely assumable, which means the lender doesn't have to approve the assumption.

However, loans originated after this date are assumable, but with some extra steps. The lender needs to approve the assumption, and the buyer must be deemed creditworthy and pay a processing fee.

You'll also need to pay the VA funding fee when assuming a VA loan, unless you qualify for an exemption.

USDA loans are assumable in two ways, but VA loans have their own rules. You can't assume a VA loan unless you're a veteran or the spouse of a veteran who died in service.

VA loans are assumable, but only for veterans or their spouses.

USDA Loans are a type of mortgage that offers favorable terms to borrowers, especially those purchasing homes in rural areas.

Most USDA loans are assumable with new rates and terms, which can change the monthly payments and interest costs.

Assuming a USDA loan with the same rates and terms is usually reserved for family members exchanging ownership of a property, and doesn't require a credit review or property appraisal.

In these special circumstances, the original mortgage's rates and terms are preserved.

An assumable mortgage allows a buyer to assume the interest rate, repayment period, current principal balance and other terms of the seller's existing mortgage rather than get a brand-new loan.

The current borrower signs the balance of their loan over to you, and you become responsible for the remaining payments, with the mortgage having the same terms the previous homeowner had, including the same interest rate and monthly payments.

You'll still need to compensate the seller for the amount of the mortgage they've paid off, which can be a significant amount, essentially as part of your down payment.

To assume a mortgage, you'll likely go through underwriting to transfer financial responsibility, and the seller's lender will put you through an approval process that requires documentation and information typical of a mortgage application.

The costs associated with assuming a mortgage are often similar to the fees for taking out a new mortgage, but they can be less, including reimbursing the seller for their equity, an assumption fee, costs related to government-backed loans, and real estate transfer taxes.

Here are some costs you may need to pay:

These costs might be worth it if the assumable loan comes with a lower interest rate than what you'd be able to get with a new mortgage.

The mortgage assumption value can be calculated in two main ways, both of which involve comparing the buyer's potential savings to the actual cost of assuming the seller's mortgage.

To calculate the mortgage assumption value, you can first calculate the monthly payment for a new hypothetical loan using the prevailing rate, current unpaid principal balance of the assumable loan, and remaining term in months on original assumable loan.

The difference between this higher payment and the original assumable payment yields the monthly savings amount, which can then be discounted using the prevailing rate to get the current value at prevailing rates.

Alternatively, you can discount the remaining series of payments from the assumable loan using the prevailing rate as the discount rate, and then take the difference between this net present value and the actual unpaid principal balance.

This approach is computationally simpler than the first one, but still gives you the mortgage assumption value.

Assumable mortgages can offer significant savings for buyers, with rates as low as 2% currently available on some listings.

By assuming a seller's mortgage, buyers can potentially save tens of thousands of dollars over the life of the loan, especially if the seller's rate is significantly lower than the prevailing rate.

The prevailing rate for 30-year loans is currently sitting at a relatively high 7.27%, making assumable mortgages an attractive option for buyers looking to lock in lower interest rates.