Is Assuming A Mortgage A Good Idea?
Posted by Richard on December 8, 2020
The seller of a home we like says assuming his mortgage would be a good deal for us. Would it?
Maybe. We can surely examine the deal. But with interest rates so low, don’t get your hopes too high.
“Assuming a mortgage” means that the buyer takes over mortgage at the existing interest rate and repayment period.
This can be a great option if the mortgage has an interest rate well below the market. For example if the current market interest rate is 6 percent and the mortgage you want to assume is 4 percent, it’s a good deal.
But, today, interest rates are very low and rates are generally better than they have been in years. Older mortgages are likely to have higher rates than loans you can take now.
Another consideration should be the seller’s equity. The seller will want to be paid for the value he already has in the property. A buyer must come up with a mortgage buyout payment that will give the seller money for that value (or equity). That can’t be part of the mortgage assumption, so it will have to be paid in cash or with still another loan.
Remember, too, when you assume a mortgage, you don’t assume the sellers credit rating. You still have to apply for the loan and meet all the lender’s requirements. You’ll find conventional lenders don’t allow assumable mortgages.
You can still assume an FHA or VA loan (in most cases) but as the buyer, you have to meet income and credit requirements.
One thing you must do before assuming such a loan is to make sure the loan is not delinquent. Any delinquent payments become YOUR delinquent payments if you assume the loan. You’ll have to apply for a loan modification if you don’t have the cash to pay up the delinquencies.
An FHA or VA loan actually can be assumed without the property being sold. This arrangement leaves the seller with a huge amount of liability. In some cases the seller could end up owing on the loan, but not owning the property.