Are you considering selling your home? If you have an assumable mortgage, it can offer some unique advantages. So let’s explore what assumable mortgages are, their benefits for sellers, the types of loans eligible for assumption and the loan assumption process.

What is an Assumable Mortgage?

An assumable mortgage is a home loan that can be transferred from the original borrower to the next homeowner. This means that the buyer can take over the exact terms of the seller's mortgage, including the remaining balance, repayment schedule, and interest rate.

Mortgage assumptions are especially attractive when the market’s prevailing interest rates are high relative to the rate on the existing mortgage. Why? Because assuming a below-market rate can save buyers thousands of dollars in interest over the remaining life of the loan.

For instance, if a homeowner purchased their property in 2020 when the average 30-year rate was 3.10%, and current rates are around 6.80%, assuming the lower rate would save the buyer $225 per month per $100,000 borrowed. 

Which Types of Loans Are Assumable? 

Generally, only federally guaranteed or insured loans are eligible for mortgage assumption. These include: 

•  Federal Housing Authority (FHA) loans: According to the FHA, loans are assumable when both transacting parties meet certain criteria. For starters, the home must be used as the primary residence. The loan servicer must also check the buyer’s credit to ensure they meet the loan requirements.
  
• Veterans Affairs (VA) loans: Qualified military members and their spouses are eligible to receive loans from the Department of Veterans Affairs. However, you don’t need to be in the military to assume a VA loan. In most cases, sellers only need their servicer’s approval before selling their home via a VA mortgage assumption.
• U.S. Department of Agriculture (USDA): The USDA offers loans to buyers of rural properties. To assume the loan, buyers must meet the USDA’s credit score and income requirements. However, even if the assumption is approved, the buyer cannot assume the mortgage if the seller is delinquent on their payments.

Conventional loans, on the other hand, are rarely assumable because they typically contain a due-on-sale clause. This clause allows the lender to demand the entire remaining balance when the property is sold. 

Benefits of Mortgage Assumption for Sellers

One of the primary advantages of a mortgage assumption for the seller is the ability to leverage it as a marketing tool. An assumable loan can make a property more attractive to potential buyers, especially when compared to homes without this option. In addition to the payment savings, assumptions allow buyers to save on closing costs because there’s no need to pay for an appraisal, title search or upfront mortgage insurance (in the case of an FHA loan). This can help bring in more, and higher, purchase bids for the seller.

The Mortgage Assumption Process 

The process of mortgage assumption involves a few steps: 

1. Verify eligibility: Check with M&T to confirm your loan is assumable and inform us of your intentions to take advantage of this feature. 
2. Qualify the buyer: Upon receipt of an application and required documents from the buyer, M&T will conduct an underwriting review to ensure your buyer can afford the loan.
3. Close the sale: Finalize the transaction with all parties involved. 
4. Transfer ownership: Lastly, transfer the title (and mortgage obligation) to the new homeowner. 

Limitations  

While mortgage assumptions offer benefits, there are limitations to consider: 

• Your Equity Position: If you have a larger equity position (more than a prospective buyer is likely to have in savings or the proceeds of their home sale) it can also make marketing an assumable mortgage more difficult as the buyer may need to finance the difference between the mortgage balance and the home's value (purchase price), potentially requiring them to qualify for and make payments on two loans.
• Rate Advantage: The attractiveness of marketing an assumable mortgage diminishes if your interest rate is close to current rates.
• Buyer Qualifications: Just like with a new mortgage, the buyer must qualify to assume the existing mortgage. This includes demonstrating sufficient income, a good credit history, and available funds for closing costs.

Ultimately, sellers with an assumable mortgage need to understand the benefits and limitations. But by leveraging this option effectively, sellers can potentially attract more buyers and secure a higher sale price for their property.
 

Questions?

Visit M&T’s mortgage servicing website for answers to commonly asked questions. 

This content is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.