Assumable mortgages for Portlanders
Now that interest rates are starting to creep up after several years of historically low rates, potential homebuyers may feel stressed about buying a house or condo. We’re here to put your mind at ease by providing a perspective about rates, as well as introducing you to an interesting option called an assumable mortgage.
Before taking a deep dive into the details, here are two examples of how an assumed loan generally works. We’ll keep it simple with a nice round number of $100,000 for both, even though we know that’s well below the median cost of a home in today’s market.
Example 1:
Example 2:
And depending on your age, your parents may even tell you that you don’t need to get a loan approval before packing up and moving in. This was true prior to the HUD Reform Act of 1989, when the U.S. Department of Housing and Urban Development implemented a requirement that buyers who assume a mortgage must qualify for the loan first.
Conventional loans rarely, if ever, include an assumption clause. Three types of home loans that are insured by the federal government are more likely to offer the option of an assumable mortgage. Here are those loan types, along with borrower requirements. Please note that these requirements must be met AND you must also make the down payment required to make the seller “whole” as described in our two examples above.
FHA (Federal Housing Authority) loans are always assumable. You’ll need to meet the standard FHA loan requirements which include a credit score of 580 or higher and a down payment of at least 3.5%. In many cases, this 3.5% down payment is lower than the down payment needed to make the seller whole.
USDA (United States Department of Agriculture) loans may have an assumption clause. In addition to meeting income requirements and living in an eligible area, you may need a credit score of 640. USDA loans can be approved with a lower credit score, but will require manual underwriting approval (a longer process).
Without a USDA down payment requirement for qualified borrowers, you’ll just need to be able to make the down payment needed for the assumed mortgage. USDA loans are likely to be assumed with a new rate and terms. The exception is for transfers between family members, who can retain the existing terms and don’t need to meet eligibility requirements.
VA (Veterans Administration) loans assumptions aren’t restricted to military members and veterans. VA loans require lender approval, starting with assessing your creditworthiness, usually looking for a credit score of at least 620. There are no down payment requirements (other than the one needed to accommodate the seller’s equity), but you’ll still need to pay the funding fee of 0.5%.
Home Mortgage Alliance, LLC has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency. Note: must include an asterisk/number next to any applicable content in the copy and disclaimer must be located above the licensing and contact details.
Today’s rates remain reasonable
Homebuyers in the Portland area have been very fortunate the last several years with mortgage rates that were low enough to break long-standing records. So, while current rates are higher than we’ve seen recently, 5% is still significantly better than mortgage rates in 1981 when they peaked at 18.45%. This chart demonstrates that rates are still at a reasonable level.The basics of assumable mortgages
Like most things, assumable mortgages aren’t “one size fits all.” An assumable mortgage is an arrangement in which the homebuyer assumes — or takes responsibility for — the existing mortgage on the house or condo they’re buying. If the seller’s current mortgage has a lower interest rate and includes an assumable clause, this could be an appealing option for the buyer.Before taking a deep dive into the details, here are two examples of how an assumed loan generally works. We’ll keep it simple with a nice round number of $100,000 for both, even though we know that’s well below the median cost of a home in today’s market.
Example 1:
- Seller still owes $92,000 on a condo valued at $100,000.
- The buyer would assume responsibility for the remaining $95,000 and would be obligated to fulfill the loan’s existing terms (number of remaining payments, interest rate, etc.).
- The buyer would provide an $8,000 down payment to cover the seller’s equity, bringing the total up to the $100,000 sale price /market value, making the seller “whole.”
- If the interest rate is low, this smaller down payment can be an attractive option.
Example 2:
- Seller still owes $55,000 on a house worth $100,000.
- The buyer would assume responsibility for the remaining $45,000 and would be obligated to fulfill the loan’s existing terms (number of remaining payments, interest rate, etc.).
- The buyer would provide a $45,000 down payment to cover the seller’s equity, bringing the total up to the $100,000 sale price/market value.
- This example could be challenging for buyers without funds for a large down payment, but could be a good situation for the right person or family.
Getting from here to there
At first glance, it may appear as though the seller simply hands over the mortgage and keys, waving goodbye and wishing you well in your new home.And depending on your age, your parents may even tell you that you don’t need to get a loan approval before packing up and moving in. This was true prior to the HUD Reform Act of 1989, when the U.S. Department of Housing and Urban Development implemented a requirement that buyers who assume a mortgage must qualify for the loan first.
Conventional loans rarely, if ever, include an assumption clause. Three types of home loans that are insured by the federal government are more likely to offer the option of an assumable mortgage. Here are those loan types, along with borrower requirements. Please note that these requirements must be met AND you must also make the down payment required to make the seller “whole” as described in our two examples above.
FHA (Federal Housing Authority) loans are always assumable. You’ll need to meet the standard FHA loan requirements which include a credit score of 580 or higher and a down payment of at least 3.5%. In many cases, this 3.5% down payment is lower than the down payment needed to make the seller whole.
USDA (United States Department of Agriculture) loans may have an assumption clause. In addition to meeting income requirements and living in an eligible area, you may need a credit score of 640. USDA loans can be approved with a lower credit score, but will require manual underwriting approval (a longer process).
Without a USDA down payment requirement for qualified borrowers, you’ll just need to be able to make the down payment needed for the assumed mortgage. USDA loans are likely to be assumed with a new rate and terms. The exception is for transfers between family members, who can retain the existing terms and don’t need to meet eligibility requirements.
VA (Veterans Administration) loans assumptions aren’t restricted to military members and veterans. VA loans require lender approval, starting with assessing your creditworthiness, usually looking for a credit score of at least 620. There are no down payment requirements (other than the one needed to accommodate the seller’s equity), but you’ll still need to pay the funding fee of 0.5%.
Facts for future buyers
In order to make a wise decision, it’s important to have access to as much information as possible ahead of time. Here are a few more details and reminders about assuming a mortgage:- The assumption cost is almost always lower than closing costs on a new mortgage. HUD has capped the fee that lenders can charge at $500.
- You must still meet income, down payment, and credit score qualifications. An assumable mortgage isn’t a way to skip the approval process.
- The mortgage will remain with the same lender, so it’s important to be aware that you won’t be choosing your own loan provider. The lender must approve the buyer before moving forward.
- An appraisal may not be needed, which saves money and eliminates a step. You should still consider getting a home inspection before finalizing your agreement.
- An assumable mortgage can be used to divide assets in a divorce or when a homeowner dies, even if the loan doesn’t have an assumable clause. When assuming a mortgage due to an inheritance, the heir doesn’t need to demonstrate creditworthiness.
Home Mortgage Alliance, LLC has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency. Note: must include an asterisk/number next to any applicable content in the copy and disclaimer must be located above the licensing and contact details.