How to Decide Whether Assuming a Mortgage Loan Makes Sense
08/13/2010 A mortgage loan assumption can be a good way to get a home provided the timing and climate are favorable. Before assuming a mortgage loan, learn all you can about it.
The first thing you should know is that some loans programs don't allow loan assumptions. Two programs that do, however, are the VA and FHA. You can assume a VA home loan or an FHA mortgage. Other programs prefer the buyer pursue the traditional route of applying for a loan and undergoing the loan approval process. Still others prefer what is called a "subject to" loan instead of a mortgage loan assumption. Although riskier, this route would appeal to an individual with a poor credit score.
As you prepare for your home purchase, you may encounter a seller who is willing to engage in a mortgage loan assumption transaction. If you do, remember these important tips.
1. Obtain two important documents.
Always get copies of two documents that will provide you with key information that'll help you figure out whether applying for a new loan makes more financial sense than assuming the existing loan: a beneficiary statement and the mortgage. These documents tell you the mortgage terms and balance and also the loan amount that's assumable.
Never assume that the interest rate obtained several years ago is better than today's rates. Today's interest rates are low and it's worth checking around to learn the lowest rate for which you qualify. An interest rate as little as two percent lower will save you a lot of money over the life of the mortgage.
3. Know the total cost of assuming the loan.
Even though you'll be assuming the mortgage, you'll still need to complete an application and qualify. These processes involve fees, and although they'll likely be less than the fees for obtaining a new loan, it still makes sense to know exactly how much you'll be charged.
While it has advantages, a loan assumption may not be as beneficial as applying for a new loan. For example, you might be able to get a lower interest rate on a new loan. Or a mortgage's alienation clause may make assuming a mortgage riskier since it means the lender can at any time require that the mortgage balance be paid off early. This is a risk few people can afford to take. Finally, if the property has built up equity, it may be financially difficult to for you to come up with the difference between the mortgage and the selling price. If financing through the seller is an option, this probably won't be a problem.
