By Cody Leovic – Updated July 10, 2023
If you’re currently in the market for a home, you may have come across the term “assumable mortgage.” Especially in today’s interest rate environment where the sticker shock of mortgage rates may be alarming, creative financing ideas such as assuming a mortgage or finding a “portable mortgage” may be a route to explore.
What is an Assumable Mortgage?
In simple terms, an assumable mortgage allows a buyer to take over the seller’s existing mortgage, including its interest rate, repayment period, current principal balance, and other terms, rather than taking on a new loan to finance the property.
It can offer some advantages for the buyer, such as potentially more favorable terms compared to obtaining a new mortgage. However, it’s essential to consider various factors before proceeding with an assumable mortgage.
It is not always an easy task to find homes with a mortgage to assume so be prepared for a bit of extra work. It will often require contacting the homeowner directly or finding other creative ways to identify these properties which we will identify in this article.
Before diving into how to find assumable mortgages, it is first important to understand how they work and to be aware of some pros and cons.
How Assumable Mortgages Work
When you assume a mortgage, you take over the remaining payments from the current borrower. This means that the terms of the mortgage remain the same, including the interest rate and monthly payments.
However, there’s a crucial aspect to consider when purchasing a home with an assumable mortgage: You’ll need to compensate the seller for the equity they’ve built up in the home, which is the amount of the mortgage they’ve already paid off plus any equity appreciation of the home. This payment is typically made at the closing as part of your down payment.
This means you will either need the cash to make up the equity amount or find a 2nd mortgage to finance the amount. If you have some of the cash, you can also contribute the cash amount you wish and then finance the remainder balance of the seller’s equity.
For instance, if a homeowner has a property valued at $300,000 with an outstanding mortgage balance of $200,000, they own $100,000 worth of equity in the home. As the buyer, you would need to make a payment of $100,000 to “pay back” the seller for their equity stake before taking over the loan.
Pros and Cons of Assumable Mortgages
Like any financial decision, assumable mortgages come with their own set of advantages and disadvantages. Let’s take a closer look:
Pros of assumable mortgages:
- For Sellers: If your existing mortgage has a lower interest rate than the current market rates, it can make your home more attractive to buyers. For example, if your current mortgage is financed at 3% and market rates are 6%, allowing a buyer to assume the existing mortgage will provide huge monthly cost savings and make your home more desirable.
- For Buyers: When assuming a mortgage, an appraisal is usually not required, which can simplify the closing process and save the buyer several hundred dollars. Although the lender may not require the appraisal, it may still be a good idea to have an independent appraisal and home inspection completed to protect yourself from any unforeseen factors that could impact the price.
- For Buyers: You can assume a mortgage rate that is much lower than current rates! Depending on the purchase price, this can result in monthly savings of hundreds or even thousands of dollars. If additional financing is needed for the seller’s equity, it’s often a smaller loan or easier to qualify for, but note that you will need to pay current market rates for the additional mortgage.
Cons of assumable mortgages:
- For Buyers: You must still apply for the loan and meet their requirements, limiting your choice of lenders. You don’t have the luxury of “shopping around” for a lender because you will need to be approved for, and take on the terms of the existing mortgage.
- For Buyers: As mentioned earlier, if the seller has substantial home equity, you will likely need to come up with the cash for a significant down payment, which could be a financial challenge.
- For Buyers: If a seller is aware of the desirability of their home because of the assumable mortgage, this may increase demand for the home and allow them to increase the purchase price, making the offer process more competitive. As a buyer, you want to be careful to not overpay for the home for the sole purpose of inheriting the mortgage. It is a good idea to calculate the monthly payments for all the homes you are considering to see how they compare.
Types of Assumable Mortgage Loans
The two most common types of loans that typically offer assumable mortgages with original loan terms are:
To assume an FHA loan, you must meet the standard FHA loan requirements, which can include making a minimum down payment of 3.5 percent and having a credit score of at least 580.
- VA loans:
Good news! You don’t necessarily need to be a member of the military to assume a VA loan. However, you will still need the lender’s approval and an evaluation of your creditworthiness.
It’s important to note that conventional loans are usually not assumable, except in specific circumstances, such as after death or divorce.
How to Assume a Mortgage
Before assuming a mortgage, you must obtain approval from the original lender. This typically involves meeting the same requirements as obtaining a regular mortgage, such as a qualifying credit score and a low debt-to-income ratio. Here are the general steps to follow:
- Confirm Assumability: Verify whether the loan is assumable and consult with the current mortgage holder’s lender to ensure they permit assumption. You may first need to get in touch with the seller so that you can get the contact information for the original lender.
- Prepare for Costs: Find out the remaining balance on the mortgage so that you can do the math on the cash you will need to bring to closing. If you think the remaining balance will require additional financing, begin shopping around for lenders that will provide that and understand the terms (note that this will vary on current interest rates, and they may be less favorable terms than the mortgage you are assuming)
- Submit an Application: Fill out an application, provide necessary forms, and submit identification. The specific process may vary depending on the lender.
- Close and Sign Release of Liability: Once the assumption of the mortgage has been approved, you’re approaching the final stage of the process. Similar to closing any other home loan, you’ll need to complete the necessary paperwork to ensure a smooth transition. One crucial document that often comes into play is the release of liability, which serves to confirm that the seller is no longer responsible for the mortgage.
During this stage, it’s crucial to pay close attention to the details of the release of liability. Ensure that all necessary information is accurately documented, including the names and contact details of both parties, the property address, the loan details, and any other pertinent information. Reviewing the document with care can help minimize the risk of any misunderstandings or legal complications in the future.
Remember, the signing of the release of liability signifies an important transition for both the buyer and the seller. It marks the moment when the torch is passed, and the buyer assumes full responsibility for the mortgage. By completing this step diligently and thoughtfully, you can create a solid foundation for a successful and legally binding assumable mortgage agreement.
As always, it’s crucial to seek professional advice and consult with experts in the field to ensure that all aspects of the assumable mortgage transaction are handled correctly.
How to Find Assumable Mortgage Homes for Sale
As mentioned earlier, finding homes with an assumable mortgage is not always an easy process, but here are a few strategies that can help:
Keyword searches on Zillow: Zillow has advanced filtering options that allow you to search for keywords in the listing. If the seller is aware they have an assumable mortgage, and are advertising it as such, they will often put that information in the listing. By using this advanced search feature, you can get a view of all homes that are available to have their mortgage assumed.
Search loan information in public records: Your county may have publicly available information on deeds and property loan information. The government entity that keeps these records is usually called the “county recorder” or “county register of deeds.” However, “recorder of deeds,” “deeds registrar,” and “deeds registry” are also common. If you search these terms in Google for your county you may be able to find the archive of deeds. If you search for a property there you can often find the loan type that was used to purchase the property.
If a home you are interested in turns out to have an FHA loan, you can reach out to the seller directly to explore the option of assuming the mortgage.
While assumable mortgages are not as common as conventional mortgages, they can present an opportunity for buyers to save a lot of money on mortgage payments if the existing mortgage has a competitive interest rate. However, there are limitations and complications associated with assuming a mortgage, such as a restricted choice of lenders and potential increases in down payment requirements. It’s crucial to carefully consider the details and consult with a real estate attorney to ensure a smooth and favorable agreement.
Cody Leovic is on the marketing and content team here at Divvy Homes. He has 5+ years of experience working on consumer banking products and has a particular interest in home buyer financing solutions - such as Divvy!
Cody has been through the home purchase process 3 times and loves sharing his thoughts on everything he as learned along the way! He provides tips and guides to help make the homeownership journey less daunting.