Are You Looking For An Assumable Mortgage?
Introduction
An assumable mortgage might be a solution to help you bypass high interest rates, and make a home or commercial property more affordable during periods of inflation. Let’s jump right in.
Residential Property
I noticed an article from Nolo titled: “Seller Financing: How It Works In Home Sales.” They have a section with the heading “Types of Seller Financing Arrangements.” This section lists the following types:
- All-inclusive mortgage
- Junior mortgage
- Land contract
- Lease option
- Assumable mortgage
Here’s what they say about an assumable mortgage: “Assumable mortgages allow the buyer to take the seller's place on the existing mortgage. Some FHA and VA loans, as well as conventional adjustable mortgage rate (ARM) loans, are assumable, with the bank's approval.”
So what is an assumable mortgage?
The concept is that instead of qualifying for a new mortgage to buy an existing home, if there is an assumable mortgage currently in place, the lender will consider having you qualify to take over payments and become the new borrower.
What you should be looking for are terms in the existing assumable mortgage, that are more favorable than you could qualify for by applying for a new mortgage.
While this concept may sound enticing, it may not be easy to attain, and of course there is much more to learn.
FHA Mortgages Provide Some Clarity About Assumptions
A good place to start learning more about assumptions is with FHA, the Federal Housing Administration. HUD, the United States Department of Housing and Urban Development oversees the FHA. FHA insures mortgages made by approved lenders
Notice that FHA is not making the loans themselves, but they are still referred to as FHA mortgages. This is so because they provide the rules that determine how lenders can make these mortgages that FHA insures. And the rule books come from HUD.
With that introduction, the big news is that all FHA single-family home mortgages are assumable. But there are plenty of details in the rule books, so it is easy to read a short description about FHA mortgages, and misunderstand something.
HUD Handbook 4001.1 is the FHA Single Family Housing Policy Handbook. There have been a series of updates through the years and there are more underway.
HUD provides more guidance in the Administration Of Insured Home Mortgages Handbook (4330.1):
CHAPTER 6. CHANGE OF MORTGAGORS (ASSUMPTIONS) OR SERVICERS AND SALE OF MORTGAGES
6-1 POLICY OF FREE ASSUMPTIONS WITH NO RESTRICTIONS.
Mortgagees must not impose, agree to or enforce legal restrictions on conveyances, or on assumptions, unless specifically permitted by CFR 203.512, or specified in a junior lien granted to the mortgagee after settlement.
6-2 ASSUMPTION RESTRICTIONS IMPOSED BY HUD.
HUD places certain restrictions on the assumption of insured mortgages originated since December 1, 1986. Depending upon when the mortgage was originated, HUD or the DE (Direct Endorsement) mortgagee may have to review the credit of the person seeking to assume the mortgage.
A. Mortgages originated before December 1, 1986, generally contain no restrictions on assumptions.
B. Mortgages originated on or after December 15, 1989, require a review by the mortgagee to determine if a creditworthiness review of the assumptor is required. Some mortgages also contain restrictions on assumptions when the assumptor will not occupy the home as a principal residence.
C. Mortgages not included in Paragraphs A or B contain assumption restrictions that have expired.
What Makes An FHA Mortgage Assumable?
What is different about the language of an FHA mortgage document compared to a typical conventional mortgage document?
A conventional mortgage is any home buyer’s mortgage that is not offered and insured by a government entity. This is the common mortgage that people typically think of.
Conventional mortgages have an alienation clause, also known as a due-on-sale clause. “An alienation clause is a provision in a mortgage contract requiring the seller to settle any outstanding balance — including any principal and accrued interest — before a property’s title can be transferred to the buyer.”
“The difference between an alienation clause and an acceleration clause is that the contract language around the acceleration clause typically centers on instances of non-payment and foreclosure rather than a sale or transfer.” From Bankrate.com, “What Is An Alienation Clause?”
An FHA mortgage does not contain an alienation clause or a due-on-sale clause. That is what makes an FHA mortgage assumable. Other types of mortgages may be assumable for the same reason. Still other mortgages will have an actual clause stating that the mortgage is assumable.
No matter what kind of mortgage is in place for a home being considered for purchase, there may be an opportunity to acquire the property subject to the existing financing. It is essential that the mortgage and note be properly reviewed before committing to such a transaction.
The information about FHA mortgages above provides both an overview of assumable mortgages, and the FHA version of assumable mortgages.Here is a look at some other types of assumable mortgages:
VA Home Loans
The U.S. Department of Veterans Affairs offers Purchase Loans, Native American Direct Loans, Interest Rate Reduction Refinance Loans and Cash-Out Refinance Loans.
For direct home loans, VA serves as the mortgage lender. VA also offers VA-backed home loans where they guarantee a portion of the loan provided by a private lender.
For the benefit of veterans it’s probably best to provide this quote from a one page PDF titled RIGHTS OF VA LOAN BORROWERS (IMPORTANT NOTICE)
“Assumable Loan. For all VA Loans committed on or after March 1, 1988, you may sell your home to someone who agrees to assume your loan if the loan holder or VA approves the creditworthiness of the purchaser(s). If the purchaser(s) is creditworthy and assumes the liability to the lender and VA to the same extent that you did when you obtained the loan, you will be released from liability on the loan. To obtain a release from liability, you should check with the company to whom you make your payments before you sell your home. The loan may become immediately due and payable if you do not obtain approval of the loan assumption before selling your home. Keep in mind that you will not be able to get another VA loan with the entitlement that you used for this loan until the property is sold and the loan is paid in full unless the purchaser is a veteran and can qualify for substitution of entitlement. The local VA office can provide you with details concerning substitution of entitlement.”
Did you notice that you do not need to be a veteran to assume a VA Loan? But this may not work out for the veteran currently liable for the loan. So it depends on their circumstances.
Here are some key features of a VA Purchase Loan:
- No down payment as long as the sales price isn’t higher than the home’s appraised value
- Better terms and interest rates than other loans from private banks, mortgage companies, or credit unions
- The ability to borrow up to the Fannie Mae/Freddie Mac conforming loan limit
- No need for private mortgage insurance (PMI) or mortgage insurance premiums (MIP)
- Fewer closing costs
- No penalty fee if you pay the loan off early
USDA Home Loans
USDA is the U.S. Department Of Agriculture. They provide loans for low income borrowers in rural areas of the U.S. And their loans are assumable. For more information a good place to start is the USDA website at Family Housing Programs
If you explore this resource further, you may find that the USDA has more to offer than it sounds like.
Using their Single Family Direct Home Loans as an example, terms and conditions of an assumption depend upon the eligibility of the new purchaser. The new borrower will typically receive new loan funds and new rates and terms assumptions must be used.
This type of assumption can be made either meeting program terms or nonprogram terms. If assumed on program terms, eligible new purchasers may receive subsequent loans to make up the difference between the amount of debt assumed and the purchase price.
In certain limited cases -- generally those involving transfers of title between family members -- a same rates and terms assumption, is permitted. Under this type of assumption, the existing note terms, including the interest rate and the remaining repayment period, do not change. (Direct Single Family Housing Loans Field Office Handbook)
Adjustable Rate Mortgages (ARM)
While most conventional mortgages are not assumable, ARMs are a form of conventional mortgage that can be assumable. To shed some light on this I Will share some of what Freddie Mac has to say.
Freddie Mac along with Fannie Mae are government-sponsored enterprises that buy and guarantee most conventional mortgages issued by lenders in the U.S. So they provide a great source of information about mortgages.
In their seller/service guide, Freddie Mac has a section on Assumability provisions and rate cap requirements for ARMs. The first paragraph is a good summary of this topic:
“The loan instruments used to originate an ARM contain the provisions governing the right of the lender to accelerate the loan, in the event of a Transfer of Ownership. These provisions determine whether or not the ARM is assumable by the party to whom the Mortgaged Premises is transferred, and if it is assumable, the transferee must agree to assume the Mortgage loan obligation. Some loan instruments provide that the ARM is assumable for the life of the loan. Other loan instruments provide that the ARM is assumable only after the initial fixed-rate period has expired or until a specified event has occurred, and is thereafter not assumable.”
The second paragraph might be a bit cumbersome if you are not a lender, but it has a nice surprise:
“The Servicer must review the loan instruments to determine the assumption provisions for an ARM. The Servicer must also refer to Sections 8406.6 and 9207.2 through 9207.8 regarding special circumstances in which Freddie Mac requires or permits an ARM to be assumed (e.g., a workout mortgage assumption and a simultaneous assumption and modification), notwithstanding the fact that the loan instruments indicate the ARM is not assumable.”
So even if an ARM backed by Freddie Mac was issued stating that it is not assumable, Freddie Mac may require or permit the mortgage to be assumed. This is good news!
The additional good news is about the rate cap involving Freddie Mac. If the ARM being assumed was issued without a lifetime ceiling on rate adjustments, the servicer must add a provision that does add a lifetime rate limitation.
The Devil Is In The Details
I’ve covered four sources of assumable mortgages and provided some details. But for each of these sources there are options that can lead to many more details.
Whether you are the seller of a property which has an assumable mortgage, or a buyer looking for an assumable mortgage, it is important to know what is actually written in the mortgage and note documents. You should take a look yourself and rely on professional advisors before signing any agreements.
How Do Assumable Mortgages Work?
Let’s explore the practical usage of assumable mortgages.
Beginning with the background above, act as if you have an assumable mortgage or you are looking for one.
If you are selling your home and have an assumable mortgage in place, you can advertise this as an advantage to prospective buyers. The advantage is greatest the lower your interest rate is compared to current interest rates.
Hopefully when you qualified for your mortgage originally, the interest rate and other terms were favorable for you. But it’s tough to predict how favorable those terms will be compared to current market rates and terms, when you are ready to sell.
If you are buying a home, the attractiveness of an assumable mortgage will depend on your personal circumstances, and what other financing options are available to you.
If you find a home with an assumable mortgage, is it freely assumable? Often it won’t be, which means that you need to qualify for it with the lender, similar to qualifying for a new mortgage. This process will evaluate your credit history, income and expenses. Closing costs tend to be less for an assumption than a new mortgage.
At that point the key issue to deal with is, what is the amount of money needed to purchase the property in addition to assuming the mortgage?
This additional money is often referred to as the down payment. I think that usage may confuse some people. A traditional down payment is the amount of money that a buyer needs to provide, typically from their own funds, to qualify for financing.
For example, an FHA mortgage requires a 3.5% down payment. Conventional mortgages require a 20% down payment. With an assumable mortgage that down payment has already been made. If you need to pay additional money to purchase a property beyond the assumable mortgage, that amount is also called a down payment.
When you assume a mortgage some of the original balance has been paid down. Whatever the remaining balance is will become your obligation. And in most cases the price you pay to buy the home will be greater than the mortgage balance you take over. How will you pay for that?
Don’t get scared away. If you were ready to get financing for the home, you knew what price you were agreeable to paying. Now you are in the midst of figuring out how you will pay for it, and the assumable mortgage is usually only part of the answer.
At this point we have reached a key consideration for the buyer. If only part of the home’s purchase price will come from the assumable mortgage, is the assumable mortgage still a good deal after determining the remaining sources of funds to complete the purchase?
The answer will vary from one buyer to another. Let’s consider a couple simple examples to put things into perspective. Keep in mind that the seller could be in a range between highly motivated to sell, or determined to get a high price.
If the remaining balance on the assumable mortgage is $100,000 and the sales price is $100,000, you only need to assume the mortgage to buy the home.
If the remaining balance is $100,000 and the sales price is $120,000, you need another $20,000.
If the remaining balance is $100,000 and the sales price is $200,000 you need another $100,000. A substantial difference from example 2.
Similar examples will apply whatever the actual numbers are, and your response will vary depending on your individual circumstances. When you started to look for a home, you probably expected to make a down payment. But these examples show how an assumable mortgage can make things different.
Example 3 presents a new test for the typical buyer. Will you have proceeds from the sale of your current home? Are you in position to qualify for a second mortgage? Or is this a first home purchase and you need a great deal to make it happen?
How To Find Assumable Mortgages
One source to consider is Realtor.com. In the home page search box enter the location you are interested in such as a zip code. Select the “price” pulldown menu from the results and check the box for “assumable mortgages.”
If available in your search area, one or more properties in your search area will be shown. If you choose one, the information about the property will include the message:
”Assumable Mortgage.” An assumable mortgage could be an option for this home. This is followed by a link to “Learn More.”
The learn more link takes you to a new page comparing a potential new loan monthly payment calculation to an assumable mortgage. But it doesn’t give you the actual interest rate in place for the current assumable mortgage. You should be able to get that from the listing agent.
Commercial Property
To provide a proper description of assumable mortgages relative to commercial property could require another substantial article. If you are new to commercial property the other parts of this article are a good introduction to understand the concepts of assumable mortgages.
As with residential property some commercial lenders offer assumable mortgages, others don’t. Sources of assumable commercial mortgages include Fannie Mae, Freddie Mac, HUD and CMBS.
Assumable Commercial mortgages compared to market rates and terms can have the advantages of lower rates, better terms and faster closing. That depends on your timing. It can also be easier to qualify without the requirements of third party reports.
If you are purchasing a commercial property and pursue the existing assumable mortgage, you may not qualify. So you should have a contingency in your contract to allow you to apply for new financing.
One of the difficulties with commercial mortgages is the cost and timeframe of a prepayment penalty. For the property seller, an assumable mortgage taken over by the purchaser of your property, will let you bypass prepayment issues. If you are applying for a new commercial mortgage, this is a big reason to get a mortgage that is assumable.
Be Careful
As you research assumable mortgages, be careful about answers from AI. Some of the information comes from other website articles that lack accuracy and sufficient details. The same applies for answers you may find to “People Also Ask” questions. Watch out for the use of terminology such as “have to” or “must.” It might not be so. And the old adage “buyer beware” still applies.
How Would Seller Financing Help?
In the Nolo article I referenced at the start, they included assumable mortgages as a type of seller financing. They are calling an assumable mortgage seller financing, since the property seller is the mortgagor and can offer this mortgage to be taken over by the property buyer.
Seller financing is also a way for the buyer who is assuming a mortgage, to pay for the difference between the purchase price of the home, and the balance on the assumed mortgage.
Of course this is so only if the seller is willing to do so. Then the seller and the buyer need to agree on terms to close the deal. How the seller and buyer proceed really depends on their personal circumstances and the details of the numbers involved.
From the seller’s perspective, their knowledge about seller financing and willingness to offer it, will vary. A seller might be willing to offer seller financing to supplement the assumable mortgage, or they might prefer to only offer seller financing as an alternative to the assumable mortgage.
Either way if seller financing is offered, the seller should keep in mind that it would be beneficial to them to structure the financing in a favorable way should they decide to sell the note in the future.
The buyer might find a home with an assumable mortgage where the seller already has an understanding and a viewpoint about seller financing. Perhaps more often than not, the seller may have no background with seller financing.
Since the buyer is the one who is probably looking for an assumable mortgage, they should be prepared to make an offer knowing what they need in order to pay for the purchase price, beyond the amount of the assumable mortgage.
So if the buyer wants seller financing, my view is that they should be prepared to make such an offer and explain it effectively to the seller. Besides learning enough about seller financing, buyers should compare the alternatives.
Depending on your situation, what is best? Is it the assumable mortgage? Is it a conventional mortgage? Is it an FHA mortgage? Is it seller financing? Or is it some combination of these and other methods?
Helpful Reading
The information above about seller financing offers an alternative to help you purchase a property with or without an assumable mortgage. To get a better handle on seller financing take a look at:
- Owner Financing Will Put Money In Your Pocket
- How Do You Overcome The Barriers To Home Ownership In 2024 And Beyound?
- Is It Time For Owner Financing?
- Utilize Commercial Real Estate Notes To Purchase Property
Conclusion
If you are interested in buying a property, I encourage you to learn more about assumable mortgages and seller financing. Consult with the right professionals and just get started looking for the right deal.
If you ever have a note for sale, please complete a worksheet so that I can get to work for you.
Photo By Kostiantyn Li On Unsplash