Assumable Mortgage: The Little-Known Mortgage Trick To Beat The Interest Rate Hikes

Assumable Mortgage: The Little-Known Mortgage Trick To Beat The Interest Rate Hikes

Are you buying or selling in a rising interest rate environment? Consider an assumable mortgage – a loan that can be transferred to another party with initial terms remaining intact. Done correctly, this option makes financial sense for both buyers and sellers. Read this blog till the end to know more about assumable mortgages. 

What Is An Assumable Mortgage? 

An assumable mortgage enables a party to assume the remaining payments on a mortgage loan without altering the current loan rate, repayment period, principal balance, and other terms. This transfer of the rights and obligations of the original loan allows the buyer to take over the mortgage payments as if they had taken out the original loan.

However, not all loans are assumable, and the lender must approve the assumption in most cases. The borrower’s ability to qualify for the loan and repay their debts will determine whether the assumption is approved.

How Many Types Of Mortage Loan Assumptions Are There? 

There are two types of mortgage loan assumptions:

Number 1- Simple Assumption: 

In this private transaction, the buyer takes over the mortgage payments from the seller. The seller remains liable for payments on the original debt, making it a risky option. Any delinquencies or defaults by the buyer will also affect the seller’s credit report.

Number 2- Novation:

The lender assigns all rights and responsibilities of the original mortgage to the buyer, releasing the original borrower from all liability. This creates a new obligation with the same terms and interest rate as the old loan. Novation agreements are a cleaner and more desirable solution, resulting in the complete mortgage transfer to the new homebuyer.

Which Ones Are The Assumable Mortgages? 

Government-backed loans such as FHA, VA, and USDA usually permit assumptions. These loans usually do not have “due on sale” clauses that would prohibit assumptions. Originally, due-on-sale provisions were introduced during the 70s and 80s for conventional loans in response to changes in lending practices. If your mortgage contract has a “due on sale” clause, the possibility of loan assumptions may be limited, and you may need to inquire with your lender directly. 

How To Assume A Mortage? 

Before assuming a mortgage loan, it’s essential to determine if your lender permits it and if you qualify. Assuming a mortgage means absorbing a homeowner’s outstanding mortgage loan and taking over payments. Here’s a brief overview of the steps involved:

  • Check if the Loan is Assumable

Firstly, consult your loan documents to determine if your loan is assumable under the “assumption clause.” If you can’t find any information, contact the lender to confirm if your loan is assumable.

  • Submit an Assumption Request

Next, you must send your assumption request to both your lender and the corresponding government entity that guarantees your mortgage and fees for the service. Fees vary based on the loan type, but FHA fees are $500, VA fees are $300, and a 0.5% funding fee. The lender may charge an additional fee, ranging from $800 to $1,000 or 1% of the loan amount.

  • Share Financial Information

The lender may require income, asset, and credit information to ensure that you can qualify for the existing loan. Specific programs allow reduced documentation; hence, consult with the lender to know the required information.

  • Sign the Assumption Agreement/Modify the Deed

The most crucial document in the loan assumption process is the deed of trust. It adds your name to the mortgage and absolves the original borrower of any obligations under the agreement. Both you and the seller must sign the final documents, which include the deed and mortgage note. These documents are recorded at the County Recorder’s Office, finalizing the process of securing the buyer’s obligation and releasing the seller’s obligation. If necessary, consider consulting a real estate lawyer for more complex transactions.

In conclusion, if you’re planning to assume a mortgage, follow these steps and consult a title company and an escrow agency to help coordinate the documents and process the recording. Don’t forget to have an owner’s title insurance policy created to guarantee added security for the buyer.

Essential Tips for Assumable Mortgage. 

Before taking over a mortgage, it’s crucial to have the lender’s approval, as it will determine who is ultimately responsible for the debt. Until the seller is formally released from liability by the lender, they’ll remain accountable, and any default by the new borrower could negatively affect their credit score.

Another critical factor in the assumption process is correctly assessing the property’s value. Although it’s not a mandatory step, obtaining a property appraisal is highly recommended to avoid overpaying. Also, conduct a title search to ensure no outstanding liens or encumbrances on the property outside the mortgage. Any issues of this nature would require attention before proceeding with the assumption.

Need Help? 

With interest rate hikes seemingly around the corner, it’s more important than ever for homeowners and future homeowners to know about assumable mortgages and the advantages that come with them. Assumable mortgages are a barely-known mortgage trick that could not only provide you with security against rising interest rates but could also be a way to save money and meet financing needs. Although it is not as widely known of an option that traditional refinancing or adjustable rate mortgages, it is becoming increasingly more popular due to its many benefits. At Stone Tree Lending we have been helping thousands of clients get into their dream homes through assumable mortgage plans. Our knowledgeable staff can answer any questions and help you apply for the perfect mortgage plan based on your unique financial situation. Don’t hesitate to give us a call today to find out how we can help make your dreams of owning a home come true.

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