Important Information About Assumable Mortgages

 An assumable mortgage not only provides funding for a home buyer to purchase a home and move into the former seller's house but the opportunity to take over the former homeowner's loan. The buyer has the opportunity to take on the remaining balance of the current mortgage on a home as well as the repayment schedule and interest rate of that mortgage.

As mortgage rates are soaring much higher than anyone expected back in January of this year assumable mortgages are becoming more attractive to buyers that are hoping to find ways to get their interest rates down. For example, if a buyer takes on a mortgage loan originated in 2016 when the average rate was around 4% this could save a hopeful buyer a whopping 3% in interest points.

There is a twist to taking on the current mortgage on a property and that is that assuming the mortgage can only be done through a government-backed mortgage. These are loans including Federal Housing Administration FHA loans, Department of Agriculture USDA loans, and other government-backed loans. And in addition to assuming the home's current mortgage debt, the buyer will be responsible to pay off the difference between the mortgage balance and the home's current fair market value. This may cause a need for a second mortgage on the property.

How to assume an assumable mortgage

For a buyer to assume a current mortgage it requires the approval of the current loan servicer. If the buyer and seller enter into an agreement to assume the mortgage without the lender's knowledge they take a huge risk. If a lender finds out that a new homeowner has taken on the mortgage without their knowledge the loan servicer is within their rights to demand payment in full for that loan as soon as possible. If the loan has remained in the seller's name with the lending bank the seller is the one responsible for clearing this debt.

With an assumable loan, once the lending bank has been notified of a buyer's request to assume the mortgage on the property they will have to go through much of the qualification process as if they were originating a brand new loan. The loan servicer will request to see the new borrower's credit report and personal financial status as well as current employment information. If they determine that the new borrower is qualified to assume the mortgage they will then release the original loan holder from liability of repayment.

As far as the payment on the difference between the home's current fair market value to the current homeowner this will have to be worked out within a legal and binding contract between the seller and the buyer. This is where it is extremely important to have the help of a trusted real estate professional to help you work out this extra payment.

There can be some great advantages to an assumable mortgage situation for both the buyer and seller and there can be some drawbacks to make sure you are aware of and taking the proper precautions. Currently offering an assumable mortgage may help to market your home to a wider set of interested buyers that are currently reluctant to purchase a home due to interest rates. It is worth noting that there could be a more complicated process of assuming a mortgage and arriving at the closing date on the sale of the property as lenders want to make sure they are covering all of their ground. An assumable mortgage can also come with a larger down payment.

For more information on purchasing real estate in Santa Cruz and surrounding areas please contact us anytime.