An assumable mortgage is a specific type of financing agreement that allows for a buyer to take over or assume a seller’s current mortgage loan. This means that any remaining balance owed on the original loan transfers to the buyer. In addition to the remaining mortgage balance being transferred from seller to buyer, the terms of the mortgage also transfer to the buyer.
In other words, the same interest rate and length of time left on the loan also transfers to the buyer. In most circumstances, the bank, or lender, that issued the original mortgage must approve of the transfer from seller to buyer.
The following basic example illustrates how an assumable mortgage might work.
For the home owner/seller, suppose:
- A home owner/seller puts their house on the market for $125,000.
- They still owe $100,000 on their existing mortgage.
For a home buyer, suppose:
- The home buyer offers to purchase the house for the asking price of $125,000.
- The buyer wants to assume the home owner’s remaining $100,000 balance of the original mortgage loan.
- Home buyer receives lender approval to take over the home seller’s loan, that has a remaining balance of $100,000.
- Home buyer takes out an additional, separate loan for $25,000.
In addition to the home buyer and seller example discussed above, there are other instances wherein assuming a mortgage may occur. An example might be where there is a death in a family and a family member wants to take over the mortgage of the deceased. Another scenario that may give rise to an assumable mortgage is if a couple divorces or legally separates and they agree to allow one spouse to take over the existing home loan.
Not all loans are assumable. There are several types of mortgages. Typically, loans that are federally-backed are assumable. This includes: FHA mortgage loans, VA mortgage loans and USDA mortgage loans. Most other loans are not assumable.
From the buyer’s perspective, an assumable mortgage may be beneficial for various reasons. For instance, the interest rate that transfers along with the loan can be substantially lower than what is currently available if they were to obtain their own, independent loan. Closing costs on an assumable mortgage are typically much lower relative to taking out a new mortgage loan.
The benefits to the buyer, such as lower interest rate and closing costs may make such a home appealing to potential purchasers. This in turn is beneficial to the seller because they are more likely to sell quickly and for their asking price, or more.
In the first example noted above, the seller of a home asks $125,000 and still owes $100,000 on their original loan. If a buyer purchases the home at full price and assumes the $100,000 original mortgage loan, they still need to come up with the additional $25,000. The second loan will most likely include closing costs and other fees associated with the loan. This drives the price of taking over the original loan up.
It may not always be financially advantageous to assume a mortgage, especially if the original loan was obtained several years ago. This is because as time passes, homes appreciate, which allows for sellers to market their homes for more than is left on the original loan. It is usually more beneficial for the buyer to assume a mortgage that is newer than a loan that was obtained by the seller many years ago.
To illustrate, here are two basic comparison examples of the sale of a cabin in the woods:
- Seller purchased Cabin A 10 years ago for $100,000
- Seller still owes $40,000
- Cabin A has appreciated in value and is now worth $250,000
- Cabin A sells for $250,000
- Buyer will need to not only assume the remaining $40,000 left on the original loan, but they will also most likely need to take out another loan for the remaining $210,000
- Seller purchased Cabin B two years ago for $100,000
- Seller still owes $90,000
- Cabin B has appreciated in value and is now worth $110,000
- Cabin B sells for $110,000
- Buyer will assume the remaining $90,000 left on the original loan, and will need to take out another loan for the remaining $10,000.
Assuming a “younger” mortgage, may be more financially advantageous for the buyer.
No matter if you are selling your home or purchasing a new one, it is a good idea to contact an experienced real estate attorney when dealing with an assumable mortgage. An assumable mortgage agreement is a legally binding agreement.
Real estate finance laws can be difficult to navigate. A real estate attorney will be able to review and discuss with you all the purchasing or selling options available, so that you are able to make the best decision for your situation.