A Comprehensive Guide to Assuming Someone Else's Mortgage

In the wake of some unfortunate situations, such as a divorce or death, transferring a mortgage to someone else is common practice during a sale. Even with outstanding payments, selling the home is possible, so taking over a mortgage is also possible. Some lenders allow mortgage transfers, provided the seller has an assumable mortgage.

What Is an Assumable Mortgage?

An assumable mortgage is a home loan a buyer can take over before a home's sale. This is a good option if you wish to purchase a house and raise a family there for several years. On purchase, the mortgage is transferred to the buyer without refinancing. This means in case the interest rate increases later or anything else that can make the property more expensive, the seller will face no issues during the mortgage transfer. The buyer can continue to pay monthly for the pending payments.

If you take over a mortgage from someone else, you can beat those rates. The seller can get a lower interest rate on the payment than you can get through traditional routes such as a bank.

Types of Assumable Loans

If you wish to take over a mortgage from a seller, you have to fulfill certain requirements and get approval from agencies backing the mortgage. Some of the different types of loans you can take over include the following:

FHA Loans

You can go for FHA loans if the seller and buyer meet the loan assumption requirements. These include the following:

• The seller should use the property for sale as a primary residence.
• The FHA loan should be assumable. After verifying this, the buyer can apply for it like any other FHA loan.

If the seller's lender finds you creditworthy, you may get approved for the loan and can assume the mortgage. Please remember that you can only assume the loan once the seller is released from it.

VA Loans

These loans are offered to eligible veterans and their spouses by the Department of Veterans Affairs. But you can get this loan even if you aren’t qualified for it. The loan office just has to approve you first. However, most individuals who apply for a VA loan are military members. Even if you aren’t, you can assume the mortgage upon approval from the VA for loans initiated before March 1st, 1988.

USDA Loans

If you wish to take over a mortgage of a rural property, you can go for a USDA loan. It requires a down payment but has relatively low-interest rates. Before assuming this loan, buyers must meet income and credit requirements and get USDA approval for title transfer. However, please remember that even if you meet all eligibility requirements, you cannot assume the mortgage if the seller misses payments.

Conventional Loans

Most traditional loans aren't assumable if the mortgage contract has a due-on-sale clause. This means that the lender can demand the loan in full once the property is sold, which will fall on the buyer.

But not if you have an adjustable-rate mortgage (ARM) which may be assumable. In some cases, if the borrower does not convert the loan to a fixed-rate mortgage, the buyer can assume this loan. However, ensure you are 100% certain you won't convert to a fixed rate before considering this loan. It cannot be assumed if the ARM loan was altered or deferred.

Check out your mortgage contract to determine if your chosen loan is assumable. If allowed, the lender will hold you accountable for eligibility requirements.

Pros and Cons of Assumable Mortgages

After taking over a mortgage, you will assume the loan balance from the seller, which means you have to make the monthly payments. Additionally, you may need to compensate the seller for the equity buildup, i.e., they paid the mortgage. This has to be paid on closing as part of the purchasing price or down payment. You can get another loan for this or pay out of pocket.

So before making this commitment, take a look at the following pros and cons to ensure you are making an informed decision.

The Pros

• Sellers whose homes can be bought on assumed loans can sell them fast, especially if the equity buildup isn't too much. This means buyers can get a new home for an affordable price.
• Most buyers who take over a mortgage don't need to do a home appraisal leading to a faster and more affordable closing. You may still get one done independently to reduce the risk of overpayment.
• Buyers don't have to look for suitable loans or compare rates, thus saving time. Even if they have to take on another loan to cover the equity, the sum will probably be smaller or easier to qualify.

The Cons

• You cannot go to a different lender if you wish to assume a mortgage. You have to apply for it and meet the requirements. Without their consent, you cannot take over the mortgage.
• Buyers need sufficient cash upfront for a down payment before assuming a mortgage, especially if the equity is high.
• Sellers may still be responsible for the debt if the buyer assumes the loan defaults on payments. In that case, the seller will feel the negative effects. If the lender doesn’t release the seller or original borrower from the mortgage liability and the new owner defaults, the seller’s credit rating will suffer.

Special Considerations

Some mortgages can be transferred even if they aren’t assumable if the lender agrees. This can happen if:

• The seller wants to transfer the loan to their children, relatives, or spouses.
• The seller is getting a divorce or separation.
• The loan is being moved to a primary trust making the borrower the beneficiary.
• The seller or original borrower passes away, and the loan has to be transferred to a relative or a beneficiary of their estate.

Eligibility requirements can differ by lender but will include a credit and income check. The lender will need proof that the mortgage assumes the buyer can afford the monthly payments before approving them.

How a Mortgage Is Transferred

If you wish to transfer an eligible mortgage, follow these steps:

Evaluate the Mortgage Paperwork

Give the original loan agreement a quick once-over to see if you can transfer it. It can only be done if the agreement doesn't have a due-on-sale clause and other aspects your real estate agent can help you determine.

Request the Transfer

Get in touch with your lender to start the transfer process. The process will differ by the loan type and the lender. For instance, you have to fill and submit a 'release of liability' form if you have an FHA loan and ensure the new owner meets eligibility requirements such as creditworthiness.

The buyer has to pay the difference between the pending loan balance and the finalized purchase price. Similarly, the same applies if you have a VA loan, but you also have to be current on payments, and the buyer must pass a credit check.

Get Extra Help

Hire an attorney with experience to ensure a smooth mortgage transfer, especially if you are transferring because of a divorce, inheritance, or joint tenant. If that isn't the case, follow the standard process.

Finalize the Transfer

The loan processing time usually takes 45 days at maximum, including the credit check. But that doesn't mean you can stop making payments. Make your loan payments on time until you receive a notification that you aren't responsible for the payments. Even a single delinquent payment can damage your credit irreparably and stop the transfer.

Finding the Best Mortgage Deals – What You Should Know

Before finalizing a loan, shop around for a suitable one by comparing offers from different lenders, whether you are assuming a loan, getting a second mortgage, or needing a new one. The good news is that even if the price is high, you may get a lower interest rate to compensate. Consider both before making a decision that will affect your future for decades.

One of the ways you can reduce upfront costs is by comparing quotes with lenders who don’t ask for an origination fee. While other charges apply, this amount can help you reduce the actual purchasing amount.

Final Thoughts on Taking Over a Mortgage

A home purchase is one of the biggest purchases you may make in your life. You must make it count and ensure you have enough money left for monthly expenses. Even if a mortgage assumption looks tempting, do your due diligence. Check if the seller is delinquent on payments and compare the price with other properties in the area. Also make sure to consult with the lender.

If done right, taking over a mortgage may be the best financial decision you may make in your life, especially if you need a home to raise your family in. Since you cannot change lenders (unless you need to make additional payments to cover equity), schedule a meeting with them as soon as possible.