Assuming the existing mortgage is not a common occurrence today, but it still can happen. What this means is that you take over on the seller’s mortgage where he left off. It sounds simple, right? The fact of the matter is that there is a lot to do in order to assume the loan – you still have to qualify for the mortgage just as you would if you were to take out a new loan. The difference is you get the remaining term and interest rate the seller paid.
What Programs Allow Assuming the Existing Mortgage?
In general, you can assume FHA loans and VA loans. No other programs allow assumptions. These loan programs are already easy to qualify to obtain, but there are some cases where assumptions are better. If the rates are higher now than they were when the seller obtained his mortgage, you could be at an advantage to assume his mortgage to save money.
How does the Assumption Work?
The bad news is that you cannot just walk in and assume a loan – you have to qualify for it. This works much the same way the approval process would work for any FHA or VA loan. You will have to provide things like:
- Income documents
- Employment information
- Asset information
- Current liability information
The lender will run the application much as he would run a new application. You have to qualify with the right debt ratios, credit scores, and income requirements. For example, you could not assume a loan if you were unemployed or you cannot assume a loan if your debt ratio exceeds the program requirements.
In addition, if you are assuming a VA loan, you have to have an entitlement for the loan. This means that you are a veteran that is entitled to a VA loan. In some cases the original entitlement from the seller stays tied to the loan, while in other cases the entitlement gets swapped, giving the seller freedom to use the entitlement on another property.
When is an Assumption a Good Idea?
Assuming the existing mortgage is not that common today because typically interest rates are low enough that there is not a lot of benefits to assuming the loan. There are some cases, however, when it is a good idea including:
- The interest rate the seller has on his mortgage is much lower than the rate you are eligible for today
- The term on the new loan you could obtain is longer than you wanted
- The origination fees charged on your new loan are very high
Aside from the lower interest rate, the assumed loan would give you a shorter term. For example, if the seller already paid on the loan for 4 years and it is a 30-year term, you would assume the loan with 26 years left instead of 30 years. This would save you on interest charges for those 4 years. You would also have much lower fees when you close the loan. There are no origination fees or discount points to pay and the settlement costs are often much lower too.
What do you Pay?
Since you are not paying very many closing costs, origination fees, or even down payments, what do you pay when you assume an existing mortgage? You pay the difference between the purchase price of the house and the amount of the mortgage that is on the home. For example, if the purchase price you agreed on was $200,000 and the seller has a $180,000 mortgage outstanding, you would have to pay the difference of $20,000. That is the equity the seller has in the property and this money goes directly to him. This is the downside of assuming a loan, as it is like the down payment, but could often be much higher than a down payment would be.
You might be wondering if assuming the existing mortgage is ever a good idea and it is; you just have to know when it is right. The obvious answer is if there is a vast difference in interest rates, assuming would be a great idea. Otherwise, the less money you have to put out upfront, the better off you will be. In the above example, there was $20,000 in equity in the home – you probably would not put down $20,000, so in that case, it might not be a good idea.
In general, however, you will pay fewer closing costs and have a shorter term. If you wish to pay the home off fast, assuming the existing mortgage can be a good idea assuming the rest of the finances make sense. If you do not assume the loan, however, you still can get the loan paid off faster, even if you take out a 30-year term. You just have to be vigilant about the payments making extra payments when you can, as this can cut the term short quickly.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.