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Is Assuming A Loan A Good Idea?

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Posted On: 10/28/2015

Question:

We’re looking at a home where the owner has told us if we buy we can assume the mortgage. Is this a good strategy in today’s market?

Answer:

There was a time when mortgages were “freely” assumable, an expression that means that a new borrower can come in and take over the loan, even if the lender objects. However, freely assumable mortgages went out of favor a long, long time ago. As an example: FHA mortgages originated after December 15, 1989 are no longer freely assumable, and the same is true with VA mortgages taken out after March 1, 1988.

In all probability, what the seller has is a mortgage that is a “qualified” assumption. With such a loan a new borrower has the right to assume the financing, but only with the approval of the lender.

The lender might have an incentive to allow an assumption, if several conditions are in place:

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• The new borrower has satisfactory credit.

• The existing interest rate is as good or better than anything the lender can get currently from other borrowers.

• The existing borrower is current on the mortgage and has not had late or missing payments.

• The lender can get a fee from the assumption process to offset costs.

Even if the lender will agree to an assumption a borrower might still be better off with new financing. Here’s why:

First, because the existing loan has been in place for a while it may be that the loan balance has been significantly paid down. This means the new borrower will have to come up with a larger down payment to purchase the property.

Second, mortgage rates at around 4 percent as of this writing, which are near historic lows. It may be that you can get better financing today than with older mortgage.

Third, if you have a lot of credit dings and a low credit score then a mortgage assumption is unlikely to help because you will still have to qualify with the lender.

Fourth, you have to keep your eyes on the entire deal. For example, if you can assume the loan but only by paying an above-market price for the property, then getting an assumption may not be a bargain.

Given the ready availability of new financing at today’s rates, it’s unlikely that a mortgage assumption is your best option. However, as is always the case, run the numbers and see what you find.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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