How to Take Over Mortgage Payments: Understanding Assumable Loans
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Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Whether it’s to buy a house with a lower interest rate or to purchase a property from a family member, more home shoppers today are asking: Can I take over mortgage payments?”
However, the concept of taking over mortgage payments on an existing home is often misunderstood. In this post, we will walk you through everything you need to know about transferring or “assuming” a home loan.
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What does it mean to take over mortgage payments?
Taking over mortgage payments might initially seem like simply stepping in to pay someone else’s monthly loan bills. However, it’s often more than that. When you inquire about taking over a mortgage, you’re typically looking to do more than just cover the costs — you’re seeking to assume the existing home loan.
This means you want to transfer the property into your name, along with the current interest rate, payment terms, and mortgage balance. It’s not just about helping someone else pay off their loan; it’s about making their loan and the benefits of their homeownership yours.
What is an assumable mortgage?
An assumable mortgage is a type of home loan that allows a new buyer to take over the seller’s existing loan terms as part of the property purchase. Instead of obtaining a new mortgage, the buyer steps into the seller’s shoes, inheriting the same interest rate, remaining balance, and repayment period.
This process can be particularly attractive in a market where current interest rates are higher than those of the existing mortgage. By assuming the mortgage, the buyer benefits from the more favorable terms initially secured by the seller. Assuming a mortgage is also a compelling way to conveniently and affordably keep a home in the family.
What types of loans are assumable?
Not all mortgage types offer the option to take over the loan. Here’s a quick rundown of the common types of loans that are assumable:
- FHA loans: Backed by the Federal Housing Administration, these loans are assumable. However, the person assuming the loan must meet the FHA’s lending criteria.
- VA loans: Available to veterans and military service members, VA loans are also assumable. The new borrower must meet VA and lender requirements, but you don’t necessarily need to be a veteran to assume a VA loan.
- USDA loans: These loans, aimed at rural homebuyers and backed by the U.S. Department of Agriculture, can be assumed. The assumer must qualify for USDA’s guidelines.
Most conventional loans are not assumable. This is because these loans often include a “due on sale” or “due on transfer” clause that requires that the remaining balance of the mortgage be paid in full if the home is sold or transferred. That said, there are some conventional loans with specific exceptions written into the loan agreement that allow for assumption. Exceptions to a “due on sale” clause can include:
- Death of a spouse, another relative, or joint tenant
- Transfers between family members
- Divorce or separation agreements
- Living trust arrangements
In addition, some adjustable-rate mortgages (ARMs) and even certain jumbo loans can be assumable. Ultimately, lender approval is key in any loan assumption, and each type of loan has its own set of rules and eligibility criteria.
How do I officially take over mortgage payments?
Taking over mortgage payments officially involves a series of steps to ensure the process is legally binding and compliant with lender requirements. Here’s what you can expect from the process:
1. Confirm the loan is assumable: Before anything else, verify that the current mortgage allows for assumption. This information is typically found in the loan agreement or by contacting the lender directly.
2. Get lender approval: Reach out to the existing lender to express your interest in assuming the loan. You’ll need to undergo a credit check and potentially meet other lender-specific requirements.
3. Review the loan terms: Carefully examine the existing loan terms, including interest rate, remaining balance, and repayment schedule. Make sure these terms are acceptable and financially feasible for you.
4. Negotiate with the seller: If the property is being sold, negotiate with the seller regarding any equity in the home. This often involves paying the seller the difference between the home’s sale price and the remaining mortgage balance.
5. Complete the assumption agreement: Fill out and sign the loan assumption agreement, which legally transfers the mortgage responsibility to you.
6. Pay assumption and closing fees: Be prepared to cover various fees associated with loan assumption and property transfer. These can include assumption fees, closing costs, and other administrative expenses.
7. Finalize the transfer: Once all paperwork is complete and fees are paid, the lender will finalize the transfer, making you the owner of the mortgage and the property. You can now officially take over the mortgage payments.
Gift tax note: If you’re assuming a family member’s home, be aware of potential tax issues if you’re buying the home under market value. Check with your financial advisor regarding ways a child can purchase a parent’s home to reduce tax liabilities.
Remember, each lender and loan type may have different procedures and requirements, so it’s important to communicate clearly with all parties involved throughout the process.
How can I find a home for sale with an assumable mortgage?
If you don’t already have a home in mind from a family member, here are some strategies to help you in your search for a property with an assumable mortgage:
- Talk to a real estate agent: Top-performing agents know how to identify homes with assumable mortgages. They can be invaluable in narrowing down your search.
- Check online listings: Visit real estate websites that offer filters for assumable mortgages. Regular browsing of these sites can reveal potential opportunities.
- Search mortgage assumption websites: Explore sites like Roam, which specialize in listing homes with low-interest-rate assumable mortgages. In some regions, there are local websites dedicated to assumable loan listings.
- Use an assumption consulting firm: Firms like Assumption Solutions and Take List can guide you, sellers, and agents through the loan assumption process.
- Network with lenders: Reach out to banks and mortgage brokers. They might have information on clients selling properties with assumable loans.
- Use social media and real estate forums: Engage in online communities, such as real estate groups on Facebook, where buyers and sellers discuss properties, including those with assumable mortgages.
- Word of mouth: Inform your personal network about your search. Friends, family, and colleagues might have leads or come across information in their networks.
Patience and persistence are key in this process, as assumable mortgages are a specific niche in the real estate market.
What are the benefits of an assumable mortgage?
An assumable mortgage comes with several advantages that can be appealing, especially in a market with higher interest rates. Here are some of the key benefits:
- Lower interest rates: If the existing mortgage’s interest rate is lower than current market rates, you stand to save significantly on interest payments over the life of the loan.
- Reduced closing costs: The closing costs for assuming a mortgage can be lower compared to those for obtaining a new mortgage.
- Possibly simpler approval process: In some cases, especially if you are assuming a family member’s loan, the process can be more straightforward and less rigorous than applying for a new loan.
- Faster closing: The timeline for closing on an assumable mortgage can be shorter than that of a traditional mortgage, potentially expediting your home purchase.
What are the drawbacks of an assumable mortgage?
While assumable mortgages offer several attractive benefits, there are also drawbacks to consider:
- Upfront cash requirements: You may need a significant amount of cash to cover the difference between the home’s sale price and the remaining mortgage balance, as well as the homeowner’s equity stake in the property, which is typical for any home purchase.
- Qualification requirements: Despite the assumable nature of the mortgage, you still need to qualify according to the lender’s credit and income standards.
- Limited availability: Not all mortgages are assumable, and finding one in your desired area can be a challenge.
- VA entitlement followthrough: With VA loans, if the assumption process is not handled correctly, the original borrower could encounter challenges with veteran loan entitlement benefits. Using an assumption service can eliminate this concern.
- Interest rate discrepancies: In scenarios where current market rates are lower than the rate on the assumable mortgage, this option might not offer financial benefits. However, this is less likely to be a concern in our current market, where many homeowners refinanced at historic low rates during the pandemic.
How do I qualify to take over a mortgage loan?
Even if your plan is to take over an existing mortgage loan, you’ll still need to meet specific criteria set by the lender. Here’s a general guide on what you can expect:
1. Credit check: The lender will conduct a credit check to assess your creditworthiness. As with a traditional mortgage, a good credit score is essential. It indicates your ability to repay the loan.
2. Income verification: You need to provide proof of stable income to assure the lender that you can afford the mortgage payments. This could include pay stubs, tax returns, or other financial documents.
3. Debt-to-income ratio (DTI): Lenders evaluate your DTI to ensure your debts aren’t too high compared to your income. A lower DTI is preferable, as it indicates a better balance between debt and income.
4. Loan eligibility requirements: Depending on the type of loan (FHA, VA, USDA, etc.), there may be specific eligibility criteria you need to meet.
5. Approval from the current lender: No matter what type of loan it is, the current lender must approve the mortgage assumption.
6. Agreement with the seller: If the property is being sold, you’ll need to negotiate with the seller, especially regarding any equity in the property and the terms of transferring ownership.
Consult with a financial advisor or mortgage expert to understand your specific situation and to ensure you meet all necessary criteria.
How much does it cost to take over a mortgage loan?
The costs associated with taking over a mortgage loan can vary based on several factors, including the loan type and the lender’s policies. Here’s an overview of typical expenses you might encounter during the assumption process:
- Assumption fee: This fee is charged by most lenders for processing the loan assumption. It can range from a few hundred to several thousand dollars, depending on the lender and the loan amount. For VA loans, a typical funding fee for a loan assumption is about 0.5%.
- Appraisal fee: To determine the current value of the property, an appraisal may be required, but can often be waived, depending on the lender and the existing mortgage balance. If needed, this fee generally ranges from $450 to $550.
- Credit report fee: Lenders will check your credit as part of the qualification process, which may incur a fee, usually around $30 to $50.
- Title insurance and search fees: These fees are for ensuring the property’s title is clear of any liens or disputes. Costs can vary widely, depending on the property’s location and value.
- Escrow and closing costs: Similar to a traditional mortgage, there are usually escrow fees and other closing costs involved, though they tend to be lower for an assumable mortgage.
- Difference in home value and loan balance: If the sale price of the property is higher than the remaining mortgage balance, you’ll need to cover the difference. This can be paid in cash or potentially financed through a separate loan. See the example below.
Example of equity/loan balance difference costs
As with any home purchase, you’ll want to be financially prepared. You may be assuming the loan, but unless it’s a family member giving you a deal, you still need to compensate the seller for the equity they’ve earned through the property. This usually is a combination of home appreciation and what they have paid off on their mortgage loan. The amount you pay will typically be included in the overall purchase price. These funds might come from your own savings or be financed through a separate loan.
Here’s an example: Let’s say you buy a $550,000 house from a seller who has a mortgage balance of $350,000. This means they have at least $200,000 worth of equity that belongs to them. You’ll need to pay them the $200,000 at closing.
It’s important to factor in these costs when considering a mortgage assumption, as they can significantly impact the overall affordability and feasibility of the transaction.
Is taking over a mortgage loan right for me?
Deciding whether taking over a mortgage loan is the right move for you hinges on the key factors we’ve explored in this guide. Here are some questions to ask yourself to assess if assuming a loan might be a good way to achieve your homebuying goals:
- Am I comfortable with the current terms of the assumable mortgage? Reflect on whether the interest rate, remaining balance, and repayment period align with your financial goals and capabilities.
- Do I meet the lender’s qualification criteria? Consider if your credit score, income stability, and debt-to-income ratio meet the specific requirements set by the lender for assuming a mortgage.
- Can I manage the upfront and ongoing costs? Evaluate if you have the financial resources to cover the assumption fee, appraisal fee, and any difference between the home’s sale price and the mortgage balance, as well as the regular mortgage payments.
- How do current market interest rates compare to the assumable mortgage rate? If the market rates are significantly higher, an assumable mortgage could offer substantial savings.
- What is my long-term homeownership plan? Think about how taking over a mortgage fits into your broader homeownership goals, whether it’s a stepping stone to a different property in the future or a long-term commitment to the home.
If the pieces fit, this path could be a strategic way to step into homeownership. However, if uncertainties or financial constraints exist, exploring other options might be more prudent. Consulting with a top-rated real estate agent or financial advisor can provide personalized guidance tailored to your unique situation.
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