Criteria for Assumable Loan Owners Credit

By Jonita Davis

In the 1980s there was a recession. Interest rates were very high and selling a home was very difficult to do. In came the assumable mortgage, by no means a new instrument at that timebut one that many homeowners sought after as a way to unload homes that wouldn't otherwise sell. In an assumable mortgage, the seller transfers the mortgage to the new buyer. It eliminates closing costs and allows the buyer to benefit from the interest rates the seller obtained. In the 1980s this was the primary draw. However, there were, and still are, some things to consider before assuming a loan.

Assuming a mortgage does not get you around the credit review component of mortgage approval. The mortgage company will review the borrower's credit before making a decision. The seller's credit does not matter. After the 2008 housing crisis, a credit score of 660 is the minimum needed to be considered for a mortgage.

All assumable loans need the approval of the bank holding the note. With the exception of Veteran's Affairs (VA) and Federal Housing Administration (FHA) loans, you must get the approval before the loan is transferred. For VA and FHA loans, the seller can transfer the mortgage without getting the approval of the mortgage company only if the seller's loans were closed before December 14, 1989 (FHA) and March 1, 1988 (VA). Otherwise, the transfer needs approval.

Not all homes are assumed for the price that the seller currently owes on the home. In fact, the buyer usually has to make up the difference in the form of a hefty down payment or a second mortgage loan. In the 1980s, buyers did not escape the high interest rates on the second mortgage. However, bulk of the loan was at the original, lower rate that the seller obtained previously.

For buyers, be sure that assuming the mortgage is a better value than getting your own mortgage. To be a better value, the current interest rate and/or the one that the buyer is eligible to obtain must be higher than the rate on the seller's loan. Also, consider the amount of money needed over the amount of the assumable loan. If the seller's price is $200,000, but you are assuming a $150,000 mortgage, then you must get a loan for $50,000 or pay it in a down payment. If the difference between the assumed loan and the purchase price is more than the value of the home, you may want to look into getting your own mortgage and haggling on the purchase price.

The lack of a closing doesn't mean the process is free. The mortgage company will charge a fee for the transfer. These include assumption fees, refunding fee and sometimes a fee for the credit report. Be prepared to pay these costs. Also, make sure that you add a "release of liability" clause to the assumption agreement. This will absolve you of any liability if the new owner defaults on the mortgage.

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