5 Common Mistakes to Avoid When Assuming a Mortgage

Are high interest rates putting your dream of owning a home on hold? If yes, you might want to get an assumable mortgage. An assumable mortgage is a unique type of government-backed loan that allows a buyer to take over a seller's existing mortgage instead of obtaining a new loan.

With current mortgage rates averaging about 6%, assuming a mortgage can allow you to unlock lower interest rates than existing market rates. 

Read on to learn common mistakes people make when assuming mortgages particularly first-time homebuyers, and discover how to assume an assumable mortgage the right way.

Mistake 1: Failing to Verify If the Mortgage Is Assumable

We hate to break it to you, but not all home loans are assumable. Generally, most conventional mortgages and jumbo loans backed by private lenders aren't eligible for assumption.

However, loans backed by government agencies like the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and United States Department of Agriculture (USDA) qualify for assumption provided buyers meet their requirements.

This begs the question: How can you determine if a mortgage is assumable? Use these strategies to verify if a home loan is assumable:

• Review the mortgage documents: Look for an ''assumability clause'' in the mortgage agreement or promissory note. If these documents explicitly state the mortgage isn't assumable or remain silent on the matter, it likely isn't.
• Contact the lender: When it comes to assumable mortgages, it's best not to make assumptions. Contact the seller's lender to confirm the loan is assumable and the seller is up-to-date on payments.
• Look for a due-on-sale clause: A due-on-sale clause states that the lender can demand full repayment when the property is sold or transferred, preventing assumption. Check whether the mortgage contract has a due-on-sale clause that restricts assumption. Just bear in mind that some contracts use the term ''alienation clause'' to refer to the same thing, so it's best to consult a real estate attorney to clarify any legal jargon.
• Use specialized mortgage search platforms: Thanks to the rising popularity of assumable mortgages due to high interest rates, there are now several online tools you can use to find homes with assumable mortgages. For instance, Assumable can provide you with access to an extensive database of assumable mortgage listings across all 50 states and in over 6,500 cities across the US.

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Mistake 2: Neglecting to Obtain Lender Approval Before Assumption

Some buyers, especially first-time homebuyers, skip the lender approval process and approach the seller directly. Don't do this. Instead, seek the lender's consent, as most FHA and VA loans require buyers to meet specific lender requirements to qualify for an assumable mortgage.

If you don't obtain lender approval, you could risk triggering a due-on-sale clause, compelling you to pay the lender the full mortgage balance immediately.

When determining whether to approve your assumable mortgage application, most lenders typically ask for the following documents:

• Tax returns
• Bank statements
• Proof of employment
• Pay stubs
• List of assets and debts
• Profit and loss statement (for entrepreneurs)

Keep these documents somewhere accessible during the assumption to expedite lender approval.

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Mistake 3: Ignoring Creditworthiness and Qualification Requirements

Like traditional mortgages, buyers must prove their creditworthiness to be eligible for mortgage assumption. When assessing a buyer's ability to make monthly mortgage payments, lenders typically look at the buyer's credit score and debt-to-income (DTI) ratio.

DTI is a figure that indicates the percentage of income a buyer has left after making monthly debt payments. Buyers with a low DTI are more likely to obtain approval.

Mistake 4: Not Budgeting for Assumption Fees and Additional Costs

Many buyers are opting to find homes with assumable mortgages because they have lower interest rates than traditional mortgages. Unfortunately, some buyers assume there are no costs associated with a mortgage assumption.

While assumable mortgages have lower fees and closing costs than conventional mortgages, they come with several costs. These include:

• Assumption fees: This is the fee that the lender charges to process the transfer of the mortgage from the original borrower to the buyer. It varies depending on the lender and loan type, but it's typically 0.5% to 1% of the remaining loan balance. The FHA caps it at $1,800.
• Equity payout: The buyer may need to compensate the seller if the seller has built significant home equity. Home equity is the difference between the home's current value and the outstanding mortgage balance. The equity payout is often the highest cost, and the buyer must pay it up front. But don’t worry, Assumable offers second position loans to help you close the equity gap and provide a blended rate still below today’s prevailing rates.
• Costs related to the government-insured loan: These costs vary depending on the type of government-backed loan. For instance, buyers assuming a VA loan must pay a VA funding fee that's 0.5% of the outstanding principal balance, while those assuming an FHA loan must pay mortgage insurance premiums.

You'll need to crunch the figures to determine whether you'll save money by assuming a mortgage rather than taking out a new loan. In some cases, assuming a mortgage can cost more than applying for a traditional mortgage, especially if the seller has built considerable home equity.

Mistake 5: Skipping a Thorough Review of Existing Loan Terms 

When you assume a mortgage, you'll inherit the mortgage's original loan terms. This means you'll take on the original borrower's interest rates, monthly payments, remaining term length, and contractual terms. Scrutinize these terms to determine if assuming the mortgage makes financial sense and to avoid surprise obligations.

For instance, if the assumable mortgage has an unfavorable, short remaining loan term, you might want to explore other options.

Here's a checklist of things to look out for when evaluating existing loan terms:

• Interest rate
• Loan balance
• Loan term
• Loan history
• Loan type and conditions
• Mortgage insurance requirements
• Property taxes

Find an Assumable Mortgage With Minimal Hassle

Taking on an assumable mortgage rather than a traditional one can be a smart way to save thousands of dollars in the long term, especially when existing mortgage interest rates are exceptionally high.

However, finding homes with assumable mortgages can be fairly tough since not all home loans are assumable. But it doesn't have to be. Using our industry leading platform you can find thousands of homes with assumable mortgages across all 50 states and in 6,500 cities across the US.

Try it today to find your dream home with just a few clicks.

Frequently Asked Questions About Assuming a Mortgage

How Much Home Can I Afford When Assuming a Mortgage?

When assuming a mortgage, calculate the total monthly payment, insurance, taxes, and closing costs to determine whether it fits your budget. Consider using an online mortgage calculator to get an estimate of how much house you can afford.

Do I Need to Get Pre-Approved Before Assuming a Mortgage? 

Yes, you must get pre-approval from a lender before assuming a mortgage to determine whether you can handle the monthly mortgage payments and other costs.

How Do Credit Issues Affect My Ability to Assume a Mortgage?

Credit issues can prevent you from assuming a mortgage because you must meet the lender's credit requirements. Often, lenders will look at your credit history and debt-to-income (DTI) ratio when assessing your creditworthiness.

What Common Documentation Mistakes Can Delay the Assumption Process?

Missing documents, incomplete information, or failing to provide required documents promptly can delay the assumption approval.

Is Shopping Around for Lenders Important When Assuming a Mortgage?

It's important to compare multiple lenders when assuming a mortgage, as interest rates, fees, requirements, and processing times vary from one lender to another.

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