Unlock the Potential of Assumable Mortgages

One of the biggest challenges for homebuyers over the past year and a half has come from rising interest rates tied to the Federal Reserve’s efforts to curb inflation.

This has resulted in higher mortgage costs, making it harder for them to qualify for and afford the financing on the home they want.

Of the many potential solutions out there, perhaps the least known but most optimal in terms of interest rates is an assumable mortgage. In short, this option allows buyers to take on, or “assume,” the existing mortgage—and all its favorable terms—of the home they’re buying. If you’re getting ready to buy, use this guide on the basics of assumable mortgages to determine how targeting one may allow you to get into your dream home sooner and more affordably than you would have thought possible.

What is an assumable mortgages?

An assumable mortgage is any loan that can transfer from homeowner to buyer with the same terms and conditions, including interest rate and payment plans. This differs from a traditional mortgage where the borrower starts from scratch with parameters and rates that reflect the market landscape at the time of purchase.

Most government-backed mortgages are assumable, including those from the Federal Housing Administration (FHA), Veterans Affairs (VA), and US Department of Agriculture (USDA). Private conventional loans are generally not assumable, nor are most jumbo loans, which are considered nonconforming loan types.

How does it work?

In general, the process of getting an assumable mortgage is similar to the that of any other loan type. The first step is finding listings that qualify. Some sellers may advertise that they have an assumable mortgage as an incentive to attract buyers, but otherwise it’s a matter of simply asking about it as you shop for homes. Once you make a decision and the seller agrees to transfer the mortgage over, you will have to apply and qualify for it, providing the typical documentation and signing the necessary paperwork to have you assume the responsibilities and liabilities.

One thing to keep in mind is that the assumable mortgage generally won’t cover the purchase price. Between the home’s appreciation over the years and the owner paying down the balance borrowed, there will likely be a difference, potentially a significant one between the cost of the home price and the amount left on the mortgage being assumed. If you have enough cash on hand, you may be able to fully fund this amount yourself; otherwise, you may need to take out a second mortgage, potentially at a higher interest rate, to make up the shortfall.

Even still, an assumable mortgage may offer a host of advantages that makes it an ideal option, including more favorable interest rates, reduced closing costs, and a streamlined approval process.

Who may qualify for an assumable mortgage?

Homebuyers who qualify for a typical mortgage loan will likely qualify for an assumable loan as well. Some of the approval criteria you will have to meet include the following.

Credit score
Creditworthiness is one of the most important factors for any mortgage. Approval of your loan assumption will hinge on having a solid credit score because it translate into less risk for the lender.

Income verification
Lenders will evaluate the income stability of each applicant along with employment history. If you are self-employed or have recently switched jobs, you may need to provide more detailed information to qualify.

Debt-to-income (DTI) ratio
Even with sufficient income, lenders will look at your other debt in proportion to your gross monthly earnings. A lower DTI reassures the lender that you’d be less likely to struggle to cover your mortgage payments amid other financial obligations.

Cash reserves
Similarly, lenders will look at your savings and investments to ensure that you are able to continue making mortgage payments, even if you experience unforeseen financial challenges.

Property appraisal
Lenders may ask for a property appraisal to determine the home’s current market value. This is especially common with government-backed loans, which have specific requirements for property conditions.

Assumable mortgages can provide you with a valuable opportunity, allowing you to navigate the current real estate market while potentially saving money in the process. As with any major decision, it’s vital that you draw on the experience and expertise of your real estate agent, mortgage advisor, and other members of your home team. With their guidance, you’ll be able to make better decisions, enjoy a smoother transaction, and find the home—and the home loan—that’s right for you.