In some cases individuals considering buying a new home may be told that the seller is willing to work on an assumable mortgage deal. In this scenario, the buyer of the property basically takes over the seller’s existing home loan rather than applying for their own deal. This can come with a range of advantages and disadvantages.

How do Assumable Home Loans Work?

If the seller is offering their mortgage as an assumable deal then the buyer of the property will basically take the loan over from them. They’ll get exactly the same rates and terms that the seller has and they’ll need to get lender approval to take the loan on. They will, however, need to be able to come with the cash to cover the difference between the mortgage and the selling price of the property if necessary. Some will do this with savings, others will use other forms of finance.

The Advantages of Taking on an Assumable Mortgage

For some, this can work out to be a good deal. For example, they may find that:

  • The actual mortgage deal that the property seller has may have been set up a few years ago and could come with rates/a deal in place that are better than those on offer in the market at the moment. FHA and VA mortgage deals can be assumed and these are often attractive to property buyers.
  • The interest rates may be set at a lower rate than the buyer can currently get because of their credit history.

There are also a few disadvantages to consider before taking on this kind of solution.

The Disadvantages of Assumable Home Loans

Both buyers and sellers need to put thought into whether this kind of deal will work for them as it may come with some downsides. For example:

 

  • Not all lenders will allow assumable deals to go through at existing interest rates and may insist on putting a new deal in place.
  • Some lenders may charge the buyer a fee to take the deal over.
  • The lender of the original mortgage may not approve the buyer to assume the loan.
  • The buyer of the property will be stuck with the exact terms and conditions that the seller originally accepted and these may not be right for them.
  • The buyer may have to raise a lot of cash to pay the difference between the property price and its mortgage. Taking on an assumable loan and re-financing (with a second mortgage, for example) to make up the difference may lose any savings they could have made and could put them under unnecessary financial pressure.
  • The seller of the property will need to make sure that they get proof that the buyer is taking over the loan so they will no longer be held liable for it.

Any consumer considering taking on an assumable mortgage may be wise to also investigate their other options in the open market. This will allow them to check that they really are getting a good deal. In some cases, they may find that it is simply cheaper to get a new deal instead. A mortgage calculator may be a useful tool during this process.