An assumable mortgage exists when a buyer "assumes" a seller's mortgage. The buyer assumes the rate, the current principal balance, the repayment period, and other terms instead of obtaining a new mortgage. This can be easier and less expensive for a buyer than obtaining a brand new mortgage. Although theoretically any loan could be assumable, conventional loans typically are not. There are two types of assumable mortgages—the FHA loan, which is insured by the Federal Housing Administration, and the VA loan, which is guaranteed by the United States Department of Veterans Affairs. The Boston real estate lawyers at Pulgini & Norton understand how both of these loans operate and can advise you on whether an assumable mortgage makes sense for you.
Assuming a Home MortgageAs a prospective buyer, an assumable mortgage can have several benefits. Among them is the possibility of avoiding paying for closing costs, which can be thousands of dollars. Often, a seller's mortgage has more favorable terms than those that the buyer would receive if he or she applied for a new mortgage. For example, the interest rate of the seller's mortgage may be better than current interest rates. Interest rates may be on the rise or much higher than the seller's existing mortgage.
A seller may benefit from allowing a buyer to assume a mortgage as well. A seller who can offer an assumable mortgage may be able to charge more money because the seller is selling not only a home but also a loan that the buyer finds favorable.
However, assuming a mortgage is not necessarily easier for a buyer than simply obtaining a new mortgage. When the buyer assumes the mortgage, he or she will still need to apply for the loan and meet any requirements set by the lender, just as if he or she were applying for a new loan. In other words, you need to qualify for the seller's mortgage, and the lender needs to agree before the mortgage can be assumed. This means that the buyer is limited to the seller's loan servicer. A loan servicer may be the lender or another entity that processes loan payments, responds to questions, keeps track of the principal and interest paid, manages an escrow account, and initiates foreclosure services.
Several factors should be taken into consideration when deciding whether to assume a loan. The seller's equity should be one factor. If the seller has too much equity in the home, you will need to pay a higher down payment. When you assume a mortgage, you usually do not need an appraisal. Typically, appraisals cost money, and since you will not need a new one, this can be a savings. However, you may want an appraisal because you do not want to assume a mortgage that would require you to overpay for the property.
When you assume an FHA-insured mortgage, you will use either a Simple Assumption or Creditworthiness process. Mortgages that originated before December 1, 1986 are subject to the Simple Assumption process. Mortgages that originated on December 1, 1986 or afterward can be acquired through the Creditworthiness process. There are certain restrictions on the assumption of loans through the Creditworthiness process.
Contact a Real Estate Lawyer in BostonWhen you buy a home, you may consider an assumable mortgage. Before you commit to any paperwork, however, you should consult a Boston real estate attorney with experience in the home financing process. At Pulgini & Norton, we advise and represent clients in Lowell, Brookline, Waltham, and other cities in Massachusetts. Call us at 781-843-2200 or contact us via our online form to set up a free consultation.