An assumable loan refers to a mortgage arrangement where a prospective home buyer is allowed to take on the existing mortgage contract of the current homeowner. This, however, is not allowed by all mortgage lenders for a typical home purchase. Loans without Due On Sale clauses, such as many VA and FHA mortgages, are generally assumable.
With an assumable loan, the current homeowner transfers their mortgage contract and obligations to a qualified buyer. In the 1970s and 1980s, these mortgage assumptions were quite popular and could be done without the mortgage lender’s permission. Nowadays, only FHA or VA mortgages may be assumed without lender approval.
Assumable loans offer benefits to both buyers and sellers. Frequently, a home buyer might find it challenging to secure a more favorable interest rate on a new mortgage compared to the rate on an existing mortgage due to the buyer’s less-than-ideal credit history or prevailing market conditions. As interest rates in the market increase, the appeal of lower rates on existing mortgages often motivates potential home buyers to seek out assumable loans.
A buyer who assumes a loan takes over the seller’s mortgage responsibilities, including the existing interest rate, as if they had originally taken out the mortgage themselves. This process also saves buyers many of the settlement costs associated with a new mortgage, resulting in significant financial savings.
Sellers benefit from assumable loans as well. They often share in the savings realized by buyers in the assumption process. For instance, if the home’s sale price is higher than the remaining mortgage balance, the buyer typically makes a large down payment, which goes directly to the seller. Alternatively, the buyer might need to secure an additional mortgage to cover the difference between the sale price and the assumed loan amount.
The primary advantage for a seller in facilitating an assumable loan transfer is the potential to command a higher price for their property. This is because the attractive terms of the assumable loan, particularly in a rising interest rate environment, can make the property more appealing to potential buyers, potentially leading to a higher sale price.
