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  • 5 Essential Things to Know Before You Accept an Assumable Mortgage

    August 5, 2016 | Blog Mortgages
  • The process of home buying is not at all easy and can involve a lot of compromises. So if you come across a home that fulfills all your conditions, then it is a great idea to compromise on easy-to-change elements like the carpet that the seller is leaving behind or the wall color. This is the perfect opportunity to opt for assumable mortgage wherein you are expected to take over and pay the remaining balance of the home loan. 


    The assumable mortgage is an attractive choice in a market where the rate of interest is on a continuous upward surge. When you end up with a locked interest rate that is lower than the market rate, it could significantly reduce the total amount that is being paid for the home. However, buyers may opt for such a mortgage for different reasons too. So here are the five essential things to know before you accept an assumable mortgage. 

    The Type of Loan and Date is important


    The process to get an FHA loan is primarily determined by the original loan’s date. If this date is before December 01, 1986 then the whole process can be successfully completed under the Simple Assumption Process where there is no requirement for approval by the lender or credit check. But if this date is beyond December 01, 1986 then it would fall under the Creditworthiness Assumption Process. This means that the buyer would need the approval of the lender, and the buyer must qualify for an FHA loan. 

    Certain Types of Loans are Eligible for Assumable Mortgage


    These types of mortgages are not very common nowadays due to the changing mortgage economy and the introduction of stricter regulations. There are some conventional loans that are not fitted with an assumable mortgage clause, but there are FHA & VA loans which are fully compatible with assumable mortgages. So the loan document should fully indicate through paperwork whether a particular loan is assumable or not. 

    Mortgage Environments are not equal


    The biggest advantage of accepting this type of mortgage is the ability to get terms that are, in general, hard to secure in the present economy. In fact, the chances of getting a loan that offers an interest rate that is lower than what is being offered today in the market are significantly lower. 


    The Pros


    At the time of securing the assumable mortgage, a buyer needs to pay upfront the full amount of equity the buyer has in his home. If there is lower equity, then the buyer needs to pay lower upfront money. If the terms of the lender are favorable, then one can avoid closing costs with the help of an assumable mortgage and buyers can skip the appraisal requirement too. Again if the buyer is taking over a VA loan, then the buyer can get favorable terms without being a veteran himself. 


    This type of mortgage has a win-win situation for the sellers as well. If the seller has an excellent mortgage term then adding the assumable mortgage can prove to be an additional selling point. This will allow a seller to charge more for the home or can help her/him in negotiating the amount the buyer pays at closing costs. If the seller, at present, is finding it difficult to make payments then an assumable mortgage can free them from the terms of the mortgage without any long-term damaging effects of such a foreclosure. 


    The Downsides of the Assumable Mortgage 


    There are downsides with almost everything in this world, and an assumable mortgage is no exception. If there is a huge amount of equity in the home, then the buyer needs to have a good amount of cash upfront or bear a burden of the second mortgage. The other downside is that the buyer would have to contend with the original lender of the loan. However, if the lender fails to approve any particular point, then the deal cannot proceed. The sellers can also face big problems if he fails to secure a liability release from the lender of the loan. Now this would worry the seller as any default by the buyer would cause serious problems for the seller. 


    Before you jump to get an assumable mortgage always determine whether the factors are in your favor and then you should sign on the coveted dotted line. Do remember that taking on a bad mortgage can prove to be more expensive in the long run.