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What is an Assumable Loan?

2017-06-27T15:36:32+00:00

The term 'Assumable Loan' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

An assumable loan is one that permits a home buyer to take over, or assume, a home seller’s contract on their mortgage. This is not permitted by every mortgage lender in the place of a typical home purchase. Loans that do not have Due On Sale clauses, such as the majority of VA and FHA types of mortgages, can usually be assumed and are considered to be assumable loans.

Assumable home loans work in the following manner. A current home owner will simply transfer over his or her mortgage contract and obligations to a purchaser who is qualified to take over. In the past decades of the 1970’s and 1980’s, these types of mortgage note assumptions proved to be quite popular. Back then, they could be done without even having to obtain the mortgage lender’s authorization. These days, the only types of mortgages that may be assumable loans without needing a lender’s actual permission are those that are made by the FHA or VA.

Assumable loans provide opportunities for both buyers and sellers. It is often the case that a home buyer will not be able to secure a better rate for a new mortgage than that provided by an already existing mortgage. This could result from the negative credit history of the buyer in question or the conditions existing in the market place at the time. As existing interest rates rise, the appeal of non-existent lower rates on mortgages commonly pushes prospective home buyers to look out for assumable loans. Such a home buyer who secures an assumable loan then has the responsibility for the mortgage that the home seller previously carried.

The existing rates of the mortgage carry over for the buyer as if the person had made the original contract themselves. This assumable loan process also saves the buyer a number of the settlement costs that are incurred in making a new mortgage. This can be a substantial cost savings benefit.

Sellers similarly benefit from assumable loans. It is not uncommon for sellers to wish to be involved in the savings that buyers realize in the process of transferring over an assumable loan. Because of this, the two parties commonly share in the savings.

As an example, when the sale price of the home in question is greater than the amount owed on the mortgage itself, then the buyer will often have to put down a significant down payment, which goes straight to the home seller in this case. Otherwise, the buyer might have to get another mortgage to come up with the difference in amounts. A seller’s principal benefit in participating in such an assumable loan transfer lies in having a good chance of getting a better price for the home.

The term 'Assumable Loan' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.