An assumable mortgage loan lets home owners transfer a mortgage loan and its terms to another borrower. The buyer “assumes” the mortgage from the seller with all the same terms. When you assume a mortgage, you are getting the same contract and terms. FHA and VA loans are most commonly assumed, although any type of mortgage can be assumed. You will need to meet the lender's specifications to qualify for an assumable mortgage loan. Things like credit, income, and assets will be examined to make sure you can comfortably afford the loan payments.
It’s very rare for a conventional loan to be assumed by a borrower. In most cases, you will not be assuming a conventional loan because most banks don’t allow for this, but there are some instances assuming conventional loans will be possible.
There are two types of assumable loans: qualifying and non-qualifying. Qualifying means buyers must qualify all over again, as if they were applying for a new loan. With non-qualifying loans, the buyer can forego the qualification process before assuming the mortgage.
Assuming a mortgage depends on the situation. Many times, a home buyer will assume a mortgage because the interest rates are dramatically lower than current rates at the time of purchase. This could save a home buyer hundreds of dollars a month on their payments. Typically, assuming a loan is a good idea if the buyer doesn’t owe more than 20% of the purchase price to the buyer.
When you assume a mortgage, that mortgage may not cover the total cost of the home. You might need to use additional money you have along with the standard mortgage fees. Whether you are getting a new loan or assuming a loan, you will have to pay the seller some money up front. With a regular mortgage, you pay the seller a down payment; but with an assumed mortgage, you pay the seller for the equity left on the home.
At one time, all VA loans were assumable since members of the military are prone to relocation. There are certain circumstances which need to happen for you to assume a VA loan. In cases where the veteran home owner is getting divorced, the VA will allow an unrestricted transfer. In this instance, the VA must approve the contract, not the lender.
Another way a VA mortgage loan can be assumed is if the lender gives the approval. When the loan is assumed with the lenders approval, the veteran is not liable if the new borrower defaults on the loan at any time.
If a home purchased with a VA loan was closed before March 1, 1988, the loan assumption is unrestricted. This means that all mortgages on homes that closed before this date are assumable. There is one hitch though, VA loans are tied to what’s called the “veteran’s entitlement.” This entitlement can stay attached to the mortgage if the buyer is not a military veteran or doesn’t have their own entitlement. If the person who assumed the mortgage defaults, the veteran will be liable for any losses the VA may incur due to the loan assumption.