Many of us learn somewhere along the line that making assumptions is dangerous. Every situation is different, and it’s better to ask more questions than assume you know what you’re talking about.
But there’s a different kind of assumption. For some looking to get the best terms, a mortgage assumption could be the way to go if you’re in the right situation. This post will discuss the concept of mortgage assumption as well as going over when and why you might choose to do it.
What Does It Mean to Assume a Mortgage?
When you assume a mortgage, you’re taking over a mortgage payment from someone else while keeping the current terms of that payment intact. Once the assumption is complete, you take over the payments on a monthly basis, and the person you assume the loan from is released from further liability.
If you assume someone’s mortgage, you’re agreeing to take on their debt. Assumptions are most commonly done when purchasing a property and wanting to take over the loan under its current terms. It may also be done in a divorce scenario when the spouse who gets the house is on the title, but not initially on the loan, for example.
Why Would You Assume a Mortgage?
Now that you know what a mortgage assumption is, why would you want to assume a mortgage rather than securing your own financing? It really comes down to the terms of the financing making sense for the person taking over.
In a purchase situation, someone might choose to assume a mortgage if the person currently in the house has a better rate than what’s available on the open market.
Someone who was legally awarded a property might choose to assume a loan if they were already on title if they didn’t want to go the refinancing route in order to take over the payments.
Assuming a mortgage definitely has its advantages, so why don’t people do this all the time? There are some restrictions.
When Can You Assume a Mortgage?
Before you go running out to find a house with a mortgage to assume, you should know it can’t always be done.
Mortgage Investor Guidelines
For an assumption to move forward, both the lender and investor in the mortgage (e.g. Fannie Mae, Freddie Mac, FHA, VA, etc.) have to agree to your taking over the payments.
One of the important things to note is that certain mortgage investors have policies prohibiting certain types of assumptions. For example, Fannie Mae generally prohibits the assumption of existing fixed-rate mortgages.
The FHA, USDA and VA all allow for both fixed and adjustable rate mortgages (ARMs) to be assumed. For all investors, the existing loan types and terms aren’t changed in an assumption.
What Sellers Should Know
If you’re selling your home and looking to have someone do an assumption, there are some requirements you have to follow as the seller.
You should be current on your loan. Quicken Loans requires no 30-day late payments in the last year before application. You also cannot have any late payments until the assumption closes.
There’s one special note for those who might be looking to have someone assume their VA loan. While anyone can assume a VA loan, the only way to have your VA entitlement restored to buy another home with a VA loan is to have the home assumed by a fellow eligible active-duty service member, reservist, veteran or eligible surviving spouse. In that case, their entitlement is substituted and your VA entitlement is restored. This isn’t the case if a member of the general public assumes your loan.
If You’re Assuming the Loan
There are a couple of things you should know if you’re taking over the loan. Let’s run through them.
First, you’ll have to fully qualify for the loan. This means having bank statements, W-2s, tax returns and any other documentation showing that you have the income necessary to make the payments. Your credit will also be pulled and your debt-to-income (DTI) ratio will be calculated.
Secondly, Quicken Loans requires that if you’re going to assume a property that it be your primary residence. Other lenders may have their own policies.