Assuming a Loan

how to assume a loan

You probably won't be assuming a loan, since most loans aren't assumable, and it's not necessarily a good deal even if it's an option. Therefore, I suggest you skip this section and go on to the next one. unless and until you come across a house with an assumable mortgage. There's a lot to know about buying a house, and taking the time to learn things that don't apply to you may only confuse and overwhelm you, and distract you from the things you do need to know.

Skip this section and go to the next section, Owner Financing

Assuming a Loan

Assuming a loan means taking over the seller's mortgage and continuing to make the payments on it. Most loans can't be assumed, because the banks don't allow it. Assumption is available only on FHA and VA loans, which are the minority. (See more on types of loans .)

Is it a good deal? It depends. First, let's look at what's the same with assumption vs. getting your own loan. In both cases, you still have to have good credit to qualify for the loan. The days of "non-qualifying assumption" are long gone. (The last of these closed in 1989.) Also, in both cases you have to pay some cash to the seller. With a regular loan that cash is a down payment; with an assumption, it's to pay the seller for the equity they have in the house. If the purchase price is $200,000 and there's $160,000 left on the mortgage, you'd either have to pay the seller $40,000 in cash or get a separate loan for the $40k.

Now let's look at the differences. The first is the interest rate. With a new loan, you pay the current market rate

for interest. But when you assume, you inherit the rate that the original buyer got when they got the loan. Interest rates are still so low that you're really unlikely to get a much better rate with an assumed loan than with a new one. But, if interest rates go up a lot, then assuming a loan with a low interest rate becomes attractive.

Another difference is the term. A new loan usually runs for 30 years, sometimes 15. But with an assumed loan, the clock started ticking when the original buyer got the loan. So it'll be paid off a little faster. If the buyer was 2.5 years into a 30-year loan when you assumed it, then you'll have 27.5 years left.

The final difference is that closing costs are lower when you assume. That's because you don't have to pay the bank's "origination fee" on the loan.

Let's put all this together: Assuming a mortgage is often a good deal when you pay no more than 10-20% of the purchase price in cash, and when the interest rate isn't higher than current interest rates.

If you have to put more money than that into it, then you're tying up that money in the house. It might be better for you to get a different house with a smaller down payment, and invest the extra cash somewhere else, like a socially-responsible mutual fund .

If you decide to assume a loan, get a copy of the loan papers (note) from the seller so you can review the exact conditions of the loan. Also, get an assumption package from the lender, which will tell you what you have to do to assume the loan.

Getting a New Mortgage vs. Assuming a Mortgage


Category: Credit

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