An assumable mortgage is a type of seller financing that allows the buyer to take over the seller’s original mortgage. In many cases, an assumable mortgage allows the buyer to purchase a home without having to qualify for a traditional loan. If the seller’s original mortgage has an interest rate lower than what is currently available, the borrower may be able to benefit from that as well.
For example: A seller owns a home with a $100,000 mortgage at 5.5% interest. He sells the home for $150,000 at 6% interest. The buyer must give the seller a $50,000 down payment. The buyer will pay 5.5% interest to the bank and .5% interest to the seller.
How Assumable Mortgages Work
There are several ways to make an assumable mortgage work. Here are a few of the most common:
- Full Assumption – A seller in poor financial straits simply gives the buyer the title/mortgage and walks away.
- Up-Front Payment – The buyer gives the seller a single payment of an agreed upon amount. In return, the buyer is given the title and begins paying the mortgage directly to the lender.
- Monthly Payments – The buyer makes monthly payments to the seller. In return, the seller keeps his percentage of the interest and makes a full mortgage payment to the lender each month. The title may be held by either party, depending on the terms of the agreement.
- Trust Account – Both the buyer and the seller are made members of a trust controlling the title and the mortgage. Payments are made to the lender each month from the trust account. The seller may also withdraw his take of the interest each month. The title is released to the buyer when the loan is paid off.
Where to Find an Assumable Mortgage
Because of the popularity of due-on-sale clauses, it can be difficult to find an assumable mortgage. Some possibilities include old mortgages, VA or FHA loans.
- Old Mortgages – People holding loans made before the late 70’s may not have signed paperwork with a due-on-sale clause. Consider looking at homes in older, more established neighborhoods where elderly residents have lived for 30-40 years.
- VA or FHA Loans – Loans from the Federal Housing Administration and Veterans Affairs are assumable. However, the new buyer must be approved. Generally, the approval process requires a credit check and income verification.
- Risky Agreements – Currently, it is very rare for a lender to actually call a loan due because of an assumable mortgage agreement. Some buyers and sellers choose to ignore the due-on-sale clause and make a deal anyway. However, this can be risky. It may not be illegal to create an assumable mortgage, but hiding the arrangement from the lender could be considered fraud.
Assumable Mortgage Alternatives
Assumable mortgages can be a good choice for some borrowers. However, they are notoriously hard to find and do carry some risk. Before deciding on an assumable mortgage, you may want to consider other types of seller financing including wraparound mortgages, carryback mortgages, private loans, and simultaneous closings.