Have you heard of an assumable mortgage?

An assumable mortgage is not something we hear about often but I have come across a few properties recently where the seller is offering an assumable mortgage option. What does this mean? It means that the seller is offering a buyer to take over or “assume” his or her current mortgage loan with the loan's current terms such as interest rate, repayment period, and principal balance. This would be advantageous if the seller had a much lower interest rate than the current interest rate at the time of purchasing a new home.

A seller would not be selling their home only for the amount remaining on their loan since over the last few years, many homeowners have gained a large amount of equity. Due to this, a buyer could assume the seller's loan at the remaining balance but would need to acquire additional funds to cover up to the purchase price. In essence, you would pay the seller fair market value for their home and assume their current loan and terms and fill in the gap with an additional down payment or a second mortgage. Overall, this could save you a few percentage points in interest on a portion of the loan amount needed.

Not all mortgage loans are assumable. Generally speaking, FHA loans, USDA loans, and VA loans contain an assumable mortgage clause. Because there are specific terms for each type of mortgage loan, you need to qualify under the same terms in order to assume another person’s loan. Most conventional loans are not typically assumable, however, look for an ‘Assumption Clause’ in your contract to find out.

There are a few steps to assuming a mortgage.

1. Verify the loan is actually assumable with the lender.

2. Prep for the costs, i.e. down payment, which will depend on the equity the seller gained.

3. Submit an application to assume the loan.

4. Close and sign liability release if approved for the loan.

If you are looking to sell your current home and you have an assumable loan, it may make your home more desirable to purchase if you offer your home mortgage to be assumed if it can save the buyer interest points. Something to consider!