With mortgage rates hovering in the 7% range, being able to snag yourself a mortgage with a much lower interest rate probably sounds very appealing. With some homeowners hanging on to a 2% rate you’re probably thinking that sounds a little too good to be true, but certainly worth looking into if it’s even remotely possible. And you’d be right on both accounts.
Assumable mortgages aren’t a new thing; they’re no more available now than they were last week, last month, or last year. So if you want to try and buy a house with an assumable mortgage, here’s a simple step-by-step approach:
* Look for homes in your price range and find one you like. In other words, do what every home buyer does and just shop for a home you truly want.
* Find out if the owner has an assumable mortgage. When you find one you want to buy, have your agent ask the seller’s agent if the owner has an assumable loan, and if they’d be agreeable to letting you assume theirs. Not all mortgages are assumable. FHA, USDA, and VA loans typically are (as long as both parties meet the criteria) but conventional loans — even if they’re backed by Freddie Mac and Fannie Mae — typically aren’t.
Keep in mind that some owners may not be interested in going through the process or risk of working with a buyer to have their mortgage assumed, especially if they have other interested buyers who are going more traditional routes with their mortgage, or paying cash. They’ll also most likely expect you (and the lender) to sign paperwork releasing them of any responsibility to the loan moving forward, because even if you assume their mortgage, they’d still be responsible for the debt if you default.
* Find out if the rate and terms they have are worth assuming. Just because they have an assumable mortgage doesn’t mean they have a rate or terms that would be agreeable to you! It may seem like every current homeowner has a 2% mortgage rate, but not all do. And while most terms of the mortgage are likely to be fairly boilerplate, you still should review the entirety of the terms of their mortgage before investing time or energy into assuming it.
* Assess if it’s even financially doable for you. When you assume a mortgage, you take over the amount they still owe, not the purchase price amount. So, for example, if you were buying a house for $400,000, and the owner had a remaining mortgage of $100,000, you either have to have $300,000 cash to give to the seller, or take out a second mortgage to make up the difference. On the other hand, if you were purchasing for $400,000 and they still owed $360,000, then that’s equivalent to a 10% down payment which many buyers have and are expecting to put down on a house.
*Make your offer contingent upon approval of the assumed mortgage. Just like any other mortgage, you’ll need to apply with the homeowners lender and get approved by them to assume the loan. So make sure you have a mortgage contingency in case you’re not approved by the lender.
*Apply for the mortgage and go through underwriting. You still have to apply for the loan through the sellers’ lender and qualify and get approved by the lender, as you would with any other lender.
Trying to find a house that even has an assumable mortgage takes some effort, and there’s still no guarantee that the owner will agree to let you assume it, or that the bank will approve you. But it’s at least worth a shot if it means saving a lot of money on your monthly mortgage payments, and the life of the loan.
You can always find out if the owner of a home you want to buy has an assumable mortgage, and if they’re agreeable to letting you assume it, you can apply for the mortgage through their lender. While it may take some effort, and there’s no guarantee that an assumable mortgage will be available on the home you truly want, it’s at least worth looking into in order to try and save money on your monthly payments, and the life of the loan.