Eligible homeowners looking to get an edge when trying to sell their home have long used the tactic of offering potential buyers the option of assuming their mortgage to entice an offer.
Home sellers with a Federal Housing Administration (FHA) loan or a Veteran Affairs (VA) mortgage can have potential buyers assume their mortgage, but the practice has slowed down recently with interest rates sitting near record lows.
The assumption of a mortgage means the buyer keeps the existing interest rate on the mortgage, which makes sense in an environment when prevailing rates are higher. For example, if you bought your home now--when rates are hovering around record lows--and then sell it in seven years, if rates are higher in 2019, offering a mortgage assumption will serve as a great lure and marketing tool.
“The biggest benefit of assuming a mortgage is the buyer gets the interest rate of the person selling the house,” says Les R. Kramsky, a real estate attorney in Marlboro, N.J. When a buyer assumes a mortgage he or she also takes over the existing mortgage balance, the monthly payment schedule along with the term of the mortgage, he says.
According Kramsky, this practice was much more popular in the 1970s and 80s when interest rates were in the double digits. Back then buyers didn’t even need to go through an approval process, they just took over a mortgage, he says. However, the seller remained responsible for the mortgage if the buyer didn’t pay.
But even now, with interest rates around 3.7%, assuming a mortgage may benefit the buyer, especially if he or she doesn’t have a stellar credit score or a lot of money for a down payment.
Nowadays, the buyer will have to go through the same approval process when assuming a mortgage as with a traditional mortgage, experts say an FHA loan is more forgiving then a conventional mortgage.
“Government loans are more lenient. They require the least amount of down payment and offer the lowest interest rates,” says Tony Auffant, senior mortgage planner at Benchmark Lending in Melville, N.Y. People with a FICO score of 640 wouldn’t be eligible for a conventional 30-year mortgage, but they could get a FHA loan, he says.
FHA loans also allow a non-occupier to co-sign the loan and afford the borrower a slightly higher debt-to-income ratio than traditional bank loans. “Given the economy, most people couldn’t qualify for a conventional loan, which is why 65% of all loans are FHA,” says Auffant. With FHA loans, you have to pay a monthly mortgage insurance premium for a minimum of five years-- regardless of the percentage put down, and you have to take out a 30-year mortgage.
But even if you have a perfect credit score, and enough cash to qualify for a conventional loan, there is one major benefit in assuming a mortgage: closing costs. According to Auffant, the lender will charge a fee that is “considerably less” than the closing costs on a new, regular loan.
This practice also has advantages for home sellers.
“With the number of homeowners in today’s economy being in financial trouble and possibly in jeopardy of losing their homes, to be able to offer an assumable mortgage to a potential buyer at a low interest rate can help them save their credit rating and better secure their chances of purchasing a new home in the future,” says Auffant.
If you do plan to offer the assumption of your mortgage, Auffant says to make sure to get a release of liability from the lender. This ensures that you are no longer legally obligated for that mortgage. Unfortunately, there is no way to search specifically for a mortgage to assume, and many homeowners aren’t aware they can even do that, so make sure to ask about it when shopping for your next home purchase.