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Assumption of A Kentucky Mortgage Loan

An assumable mortgage is a type of home loan that allows a new buyer to take over the seller's existing mortgage instead of obtaining a new loan. Here are the key points about assumable mortgages:

  1. Transfer of responsibility: The buyer assumes the remaining balance, interest rate, repayment term, and other conditions of the seller's mortgage.
  2. Potential benefits:
    • Buyers may get a lower interest rate than current market rates
    • Lower closing costs compared to a new mortgage
    • Simplified process in some cases
  3. Restrictions:
    • Not all mortgages are assumable
    • Lender approval is usually required
    • The buyer typically needs to qualify financially
  4. Common types:
    • FHA loans
    • VA loans
    • Some adjustable-rate mortgages (ARMs)
  5. Considerations:
    • The buyer may need to make up the difference if the purchase price exceeds the remaining mortgage balance
    • There may be fees associated with assuming the mortgage


Advantages and disadvantages of assuming someone's mortgage loan.

Advantages:

  1. Lower interest rates: If current market rates are higher than the rate on the existing mortgage, the buyer can benefit from a lower rate.
  2. Lower closing costs: Assuming a mortgage often involves fewer fees than getting a new loan, potentially saving thousands in closing costs.
  3. Easier qualification: Sometimes, the qualification process for an assumable mortgage is less stringent than for a new loan.
  4. Avoiding appraisal: In some cases, a new appraisal may not be required, which can save time and money.
  5. Preserving favorable terms: If the original mortgage has beneficial terms, such as a low fixed rate or no prepayment penalty, these can be preserved.

Disadvantages:

  1. Limited availability: Not all mortgages are assumable. Conventional loans are rarely assumable, while FHA and VA loans are more likely to be.
  2. Lender approval required: Most assumable mortgages still require the buyer to be approved by the lender, which can be a hurdle.
  3. Possible down payment gap: If the home's purchase price is higher than the remaining mortgage balance, the buyer needs to cover the difference, potentially requiring a large down payment or second mortgage.
  4. Seller's liability: In some cases, the original borrower may remain partially liable for the loan unless formally released by the lender.
  5. Outdated loan terms: If interest rates have fallen significantly since the original mortgage was issued, assuming the loan might not be advantageous.
  6. Potential due-on-sale clause: Some mortgages have a due-on-sale clause that requires full repayment upon transfer, which can complicate or prevent assumption.
  7. Assumption fees: While often lower than new loan costs, there may still be fees associated with assuming a mortgage.
  8. Less flexibility: The buyer is locked into the existing loan's terms, which may not be ideal for their financial situation.


What is an Example of an Assumable Mortgage?


An example of an assumable mortgage would typically involve a government-backed loan, as these are the most common types of assumable mortgages. Let's walk through a specific scenario:

Example: FHA Loan Assumption

  1. Original Mortgage:
    • Loan type: FHA (Federal Housing Administration) loan
    • Original loan amount: $300,000
    • Interest rate: 3.5% fixed
    • Term: 30 years
    • Time elapsed: 5 years
  2. Current Situation:
    • Remaining balance: $270,000
    • Remaining term: 25 years
    • Current market interest rates: 5.5%
  3. Assumption Process:
    • Home seller lists their property for $350,000
    • Buyer agrees to purchase and assume the existing FHA loan
    • Buyer applies with the current lender to assume the mortgage
    • Lender reviews buyer's credit and financial situation
  4. Outcome:
    • Buyer is approved to assume the mortgage
    • Buyer takes over the remaining $270,000 loan at 3.5% interest
    • Buyer pays the $80,000 difference ($350,000 - $270,000) as a down payment or obtains a second mortgage
  5. Benefits for the Buyer:
    • Obtains a 3.5% interest rate instead of the current 5.5% market rate
    • Saves on closing costs compared to a new mortgage
    • Inherits the remaining 25-year term of the original mortgage

This example illustrates how a buyer can benefit from assuming an existing mortgage, particularly in a rising interest rate environment. The process preserves the favorable terms of the original loan while allowing the property to change hands.




This sounds good on paper but in reality it never works. I have never done in my 20 years of doing mortgages and if they decide to go that route, they must get approved with the current servicer of the loan in which can be a very cumbersome process and usually does not work. 


Below I listed the reasons why assuming someone's mortgage does not work. In the end, most servicers will not make an assumption of the current mortgage because they don't want to be on the hook for such a low rate. Most lenders are trying to get rid of the low fixed rates on their books that were made during the Pandemic.



Only Certain Loans Are Eligible


Only USDA, FHA, and VA loans are eligible for mortgage assumption. Additionally, sellers may have to jump through a few hoops to release themselves of liability from the loan. This situation makes assumable mortgage loans less appealing to sellers if they have traditional offers on the table.


A Large Down Payment Is Required


The biggest obstacle to assuming a mortgage loan is the large down payment. You can obtain a second mortgage if you do not have the cash to cover the seller’s equity, but this situation can complicate things a bit. Depending on how much equity the seller has, it may be easier and more advantageous for you to obtain a traditional mortgage.


Stringent Approval Process



Assuming a mortgage isn’t a walk in the park. Buyers must provide extensive documentation and undergo a lengthy approval process, often taking up to 90-120 days. This can be cumbersome and time-consuming, potentially delaying the home buying process. Most services of current mortgage loans will not do an assumption due to the low rate.


Seller’s Liability



In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties’ credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.



Assumptions are permitted, however they are rarely used as 7 CFR 3555.256(b)(2) requires the transferor to remain personally liable for the debt after the acquisition and assumption (among other requirements) Names cannot be removed from the loan without a refinance of the loan.



Assuming A Mortgage Loan.



Questions about assuming someone's mortgage. Contact me below.



Thanks

Joel Lobb Mortgage Loan Officer NMLS 57916
EVO Mortgage
911 Barret Ave, Louisville, KY 40204
Company NMLS ID # 173846

Text/call: 502-905-3708

email: kentuckyloan@gmail.com


http://www.mylouisvillekentuckymortgage.com/








NMLS 57916 | Company NMLS #173846

The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people.
NMLS ID# 57916, (www.nmlsconsumeraccess.org).