What is an Assumable Mortgage? - Definition & Requirements

Instructor: Tisha Collins Batis

Tisha is a licensed real estate agent in Texas. She holds bachelor's in legal studies and a master's degree in criminal justice.

Assuming a seller's existing mortgage is a good option for some homebuyers. In this lesson, we'll define an assumable mortgage and discuss its requirements.

Introduction

Keelan and Tisha searched for their dream home for nearly a year. Finally, one day, their realtor showed them the home that stole their hearts. It had everything on their mental checklists, plus things they didn't realize they wanted. They rushed to their lender to discuss mortgage options, and found out that interest rates had increased since they began their search. In fact, interest rates had increased so much that their dream home was now out of their reach. What could they do? Were there any other options for them?

Definition

An assumable mortgage is a mortgage that a buyer can take over from a seller. Instead of getting a mortgage themselves, the buyer can assume the mortgage that the seller already has in place. The lender has to approve the assumption, but it's an option in some situations.

Mortgage

Requirements

There are requirements for an assumable mortgage that buyers must be ready to fulfill. Basic requirements include the buyer agreeing to make all future payments, the buyer's creditworthiness meeting the lender's guidelines, and the lender being on board with the transaction. In addition, there may be other requirements depending on the type of mortgage.

Both FHA and VA loans are assumable, each with their own requirements. For example, each has its own income and debt-to-income ratio requirements as well as a creditworthiness requirement. Not everyone can qualify for a FHA or VA loan, and buyers must keep that in mind when considering assuming a mortgage.

Examples

Keelan and Tisha realized early on that they couldn't afford the higher interest rates they were facing. They didn't want their dream home to get away from them, so they asked their lender if the mortgage was assumable. The realtor found out that it was, so Keelan and Tisha decided to assume the existing mortgage instead of getting their own.

The existing mortgage was a VA loan. Fortunately for Keelan and Tisha, Keelan was a veteran and therefore eligible for a VA loan. They applied to assume the mortgage. Their credit scores were great and their debt-to-income ratio was well below the guidelines. Their dreams came true when they were able to assume the existing mortgage and move into their dream home.

Tabie was new to town and found a cute little house for sale. She was a single mother with three children. Recently, she had gone through nursing school but was unable to obtain her RN license. Instead, she was stuck with her LVN license and a lower income. Her credit wasn't great due to a divorce. The house fit all of her needs and she really wanted it for her children. What could she do?

After speaking to a mortgage lender, Tabie decided to try to assume the existing mortgage on the home. It was a FHA loan. For a week, she worried about whether or not she would be approved. Unfortunately for Tabie, she was not approved. Her credit score was too low and her debt-to-income ratio was too high. She was stuck renting a home until she could pay some bills off and repair her credit. She didn't meet the creditworthiness or debt-to-income guidelines of the lender, so she didn't have access to the money needed to buy the home she wanted.

Bank Vault

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