Most home buyers today apply for and, hopefully, are approved for their mortgage. They are subject to current lending standards and interest rates.

But a few buyers can simply take the loan that’s currently attached to the subject property by performing what’s called a “loan assumption.” An assumption is simply taking over the responsibility for the loan that’s currently on the property. No loan choices, and no decision on points, just take what the seller has. Can you really do that?

Yes, actually you can, but there are certain restrictions and realistically only a few home buyers will actually be able to assume a loan. But when they work, assumptions can be great for both buyer and seller.

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Assumable loans

Typically only VA or FHA loans can be assumed. These loan types have assumption clauses built into the language of the loan. Other loan programs such as conventional mortgages using Fannie Mae or Freddie Mac rules typically don’t have an assumption feature, although it’s possible.

With an assumption, the buyer simply “takes over” the mortgage at the closing table and does not have to obtain financing in the traditional fashion from a bank or mortgage company. VA and FHA both allow for assumptions in a “qualifying” and “non-qualifying” fashion.

Non-qualifying assumptions

Loans that were funded before December 14, 1989, are freely assumable, meaning the buyers don’t have to qualify for the assumption in any fashion. Buyers don’t have to meet minimum credit standards or even provide employment documentation. All that needs to occur is paying an assumption fee at the closing table in addition to the required closing costs. These loans are of the “non-qualifying” type.  While there aren’t very many of these loans still around, after all, any existing mortgage originating nearly 25 years ago has been most likely paid off or refinanced since then.

Qualifying assumptions

For FHA and VA loans that were funded after December 14, 1989, while the loans are still assumable, the buyers must demonstrate the ability to repay the mortgage and qualify as with any other loan type. If a seller has an FHA or VA mortgage on the property, the loan may be assumed by any qualified buyer.

The process is nearly identical to applying for a new loan at a mortgage company by completing the application and providing the required documentation such as pay stubs, tax returns, and bank statements.

There really is no cost savings benefit to the buyers when an assumption takes place and the time it takes to approve an assumption is much like any loan. So why would someone assume a mortgage instead of getting a brand-new one?

Because the existing mortgage might be better than anything currently on the market.

Check your home buying eligibility. Start here (Nov 21st, 2024)

Assumption benefits buyer & seller

For example, say that current mortgage rates are at 7.00 percent. And you’ve got your eye on a property that has an FHA or VA loan on it. The seller of the property may not know that the loan is assumable so sometimes you have to ask. But if the rate on the existing mortgage is 3.50 percent and rates are twice that, don’t you think an assumption is an attractive option?

That means for those who have an existing FHA or VA loan originating within the past couple of years have a bonus feature: a rate at or near historic lows. Rates we may never see again in our lifetimes.

Now project five or seven years down the road. What will the rates be then? In all likelihood, mortgage rates will return to something near their historic norm, perhaps between 6.00 and 7.00 percent.

Having an assumable FHA or VA loan is not only good for buyers but can be a great marketing tool for sellers.

If there were two identical houses for sale, side by side, do you think that an assumable mortgage with a 3.50 percent 30-year fixed rate adds value to the home? You bet it does. Having an assumable mortgage at an attractive rate will make the home easier to sell and buy. It’s an assumption you can count on.

Check your mortgage rates. Start here (Nov 21st, 2024)