Assumable Mortgage
Contributed Article : Assumable Mortgage vs Purchasing
Assumable mortgages are receiving renewed attention due to rising market interest rates. An assumable mortgage is one which specifically allows "assumption" of the mortgage by a party other than the current borrower, which generally is desirable in case of a change in ownership, i.e a sale. With an assumable mortgage, it is possible for the buyer to assume the sellers current mortgage instead of taking out a new mortgage to pay it off. The only current examples of mass market assumable mortgages are FHA and VA mortgages, which are not true assumable mortgages because the new borrower, the buyer, must essentially apply for the loan and be approved in order to assume the mortgage. The number of loans which anyone can assume with balances high enough to merit consideration for assumption is very low, especially with the run up in real estate prices over the past 20 years since assumptions lost favor.
Most lenders do not offer assumable mortgages because it encourages low rate mortgages to remain on their books when property are sold, substantially reducing their profit margin (just because it's fixed for 30 years doesn't mean they want you to take 30 years to pay it off, they'd prefer you did it in 3 or 5 like everybody else.). Because of the current attitude toward assumable mortgages, some buyers and sellers have entered into "wrap-around" mortgages which basically entail the seller and borrower entering into a private mortgage which wraps around the old, non-assumable mortgage. For example, a seller may have a mortgage at 6%, however market interest rates are about 7.5%. The buyer pays the seller monthly payments of more than the 6% payment on the old loan, which the borrower then uses to pay the old mortgage until it is paid off. It's about as risky as things get in the mortgage world, for both parties, and severely limits the seller's ability to obtain other financing because the old mortgage obligation remains on his credit report and impinges on his income from creditor's perspectives. Additionally, there is tremendous risk of being "caught" by the lender, which can have unconscionable but legal financial penalties which I won't scare you with here. If you are considering a wraparound or an assumable mortgage without a release of liability, stop right now.
Tell your buyer to look into a loan with a minimum payment option and a fixed rate, so he can make smaller payments without risking your credit.
Limited Time Offer: 30 Year Fixed Rate w/ 1.25% Payment Option. Free Appraisal.
Mention Promotional Code 30FIXED
Get More Information. Call Toll Free (800)515-8443
Other Info on Assumable Mortgages:
Not necessarily the Opinion of R1
Assumable Mortgage - An assumable mortgage is a mortgage that can be transferred with no change in terms. It allows you to take over a mortgage on a home you are buying or allows a buyer to take over your mortgage if you are selling your house. If an assumable mortgage is transferred, the buyer assumes all responsibility for repayment. The advantage of this is that you assume a mortgage with a lower interest rate than current rates, without paying high closing costs. Assumable mortgages can make a property more desirable during times of rising interest rates, since the new buyers payments are at the original rate.
Lenders will often have a minimal charge assocciated with an Assumable Mortgage to cover the documentation, and recording of the transfer. In most cases the buyer or person assuming the mortgage will still need to qualify for the loan based on credit, income and other factors.
Assuming other borrowers mortgages has not been a popular thing to do for the past 5 to 6 years because there has been an environment of declining rates during that period. If an environment of increasing rates starts to occur, assuming another borrower's loan will become more and more popular for homebuyers. The reason being simply that these existing loans will be at interest rates that are unavailable on the current market.
An Assumable mortgage requires the lender's approval. When you assume a mortgage you inherit both its interest rate and monthly payment schedule. An Assumable Mortgage can mean big savings if the interest rate on the existing mortgage is lower than the current rate on new loans - the lender, though, can change the loan's terms. Assumable mortgages aren't a free ride: you still need to qualify for the loan and you have to pay closing fees, including the costs of the appraisal and title insurance.
In an assumable mortgage, the lender will also hold the seller liable for the loan. For example, if you default and the lender forecloses, but the property sells for less than the balance remaining on the loan, the bank may sue the seller for the difference.
Scenario #1:
John wants to sell his home for $95,000 and has an assumable $90,000 loan at 7% interest. Marvin wants to buy John's house. Marvin just needs to put down $5,000 (plus closing fees) to take over John's home and mortgage.
Scenario #2:
Jimmy got an assumable loan 15 years ago for $80,000 at 6.5% interest. The loan balance today is $70,000. Kristen wants to assume the property, which is now worth $160,000. Kristen must raise $90,000 (plus money for closing costs) to close the deal.
Since 1989 for FHA and 1988 for VA loans, assumption requires approval of the agencies. Any FHA or VA loans closed before then and assumed since, only require the approval of the owner, but the owner remains responsible if the buyer defaults.
Disclaimer: The opinions expressed in the Contributed Articles section of this website may have been contributed by independent third parties and are not necessarily those of Envision Lending Group / Refinance One. Any enquiries regarding the content of these articlees should be directed at (212)537-6026.
