What is an Assumable Mortgage?

An assumable mortgage is a method of financing that allows the transfer of an existing mortgage and its terms from the initial borrower to the subsequent buyer.

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How Does an Assumable Mortgage Work?

An assumable mortgage is one of the many ways through which homebuyers finance the purchase of a property. Ordinarily, most homebuyers approach a lending institution to obtain a mortgage which allows them to purchase a home. There are specific terms contained in the loan agreement, such as the principal amount, interest rate, repayment schedule, security interest attachment, and others. If the homeowner decides to sell the property in the future but still has some outstanding mortgage loan to pay back, the assumable mortgage allows her to transfer the mortgage and all the terms to the subsequent homebuyer.

Even More of an Explanation of an Assumable Mortgage

There are two types of mortgage loans that are assumable, Federal Housing Administration (FHA) loans and the Veterans Affairs (VA) loans. Other categories of loans such as conventional loans are not assumable. The subsequent homeowner must specifically assume the outstanding debt. It is important to know that the transfer of the mortgage is subject to the approval of the mortgage lender. The original loan agreement will specify the requirements that a homebuyer must meet before the assumable mortgage can be approved by the original lender. If an assumable mortgage bid is not approved by a lender, the seller may be able to identify another buyer who will meet the requirements of the lender. An assumable mortgage provides numerous benefits. It saves time and effort in securing a new mortgage. It may allow the subsequent purchaser to assume a mortgage with more favorable terms than they could secure in a new loan. There are specific conditions that determine the cost and benefits of an assumable mortgage. The first is the existing balance of the mortgage. For instance, if the homeowner or seller of a property has an existing balance of $200,000 and the home to be purchased is $350,000, it means the buyer will make a down payment of $150,000 to make up the difference between the balance and home value. Another option would be for the new purchaser to take a second mortgage to cover the difference in value and purchase price.