When is it a good idea to look for an assumption?
Assuming, or taking over, an existing mortgage is the key that opens the door to homeownership for many buyers. If you don't have the minimum down payment your lender requires, if your income fluctuates or does not meet the lender's debt-to-income ratio, or if your credit history is less than perfect, an assumption may be the way to go.
Many assumable loans are obtained through the Federal Housing Administration, although some older assumable mortgages from banks still exist. Assumptions generally cost less at the settlement table because fewer fees are required. FHA loans made before December 15, 1989 can also be assumed by a buyer meeting minimal credit requirements. In this case, however, the seller retains responsibility for the mortgage if the buyer defaults. If the buyer qualifies for a FHA loan originated after that date, the seller can request a "release from liability."
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- Often, assumable loans are older and may carry a higher interest rate, and the buyer could need a lot of cash to take one over. The seller can take back a second mortgage equal to the difference between the value of the first mortgage and the price of the home, plus a discount fee. The seller can then either collect the monthly payments, or sell the second mortgage at a discount to raise immediate cash.
- If the interest rate on the assumable loan is higher than current market rates, the buyer has the option of establishing a good credit history and then refinancing to a lower rate.