Millions of Americans are squirming over their falling home values.
Foreclosure, loan modifications and refinancing are the most common ways out of a home ownership headache. But there’s another solution on the horizon – “assumable” mortgages. Assumable mortgages allow a third party to waltz in and take ownership of your home loan – with your lender’s blessing.
Are they a good deal – or a big mistake? BankingMyWay takes a look.
Let’s start from scratch. Assumable mortgages, by definition, mean a mortgage that can be taken over (or “assumed”) by another individual. The buyer assumes the remaining debt owned on the bank note attached to the house, and the seller is off the hook for any further house payments.
That’s how it works in theory. In reality, many home mortgage contracts don’t allow for assumable transfers. But the mortgages that do qualify have some big loan institutions attached. Both the Federal Housing Administration (FHA) and the Veterans Administration offer assumable transfer language in their government-backed mortgages. Increasingly though, each are scaling back on such deals.
Assumable mortgages can be attractive to home buyers who either can’t get a decent mortgage interest rate and, in a lot of cases, may not have a big down payment.
But cutting an assumable mortgage deal isn’t all milk and honey for the buyer. For instance, a buyer still has to qualify for an assumable mortgage – and will go through the same gauntlet as any home mortgage consumer, including a credit check, income verification and closing costs and fees that will be familiar to anyone who’s closed a traditional mortgage deal.
For the buyer, interest rates are a huge factor to consider before entering into an assumable mortgage contract. With mortgage rates currently fairly low – at 5.55% for a 30-year fixed-rate mortgage according to the BankingMyWay Mortgage Rate Tracker, the demand side might be a bit soft. There are two schools of thought on that. Buyers can probably get a similar interest rate on a regular mortgage with significantly fewer hassles than with an assumable mortgage. And sellers with a high current home mortgage rate of, say, 7.5%, probably will have a tough time transferring their mortgage in a rate environment where buyers can get a loan rate that’s a full two points lower.
Yet because of the sliding value of the average U.S. home and the alarmingly high rate of foreclosures, getting into a home via an assumable mortgage might be a fairly cheap proposition. According to RealtyTrac, approximately 360,000 properties filed for foreclosure in July, a 7% uptick from June and a 32% upward swing from July 2008. And home values in many U.S. regions, most notably California and Florida, have fallen by as much as 40% since the economic crisis started gathering steam in 2006.
Consequently, plenty of potentially distressed sellers are out there – and might jump at the chance of cutting an assumable mortgage deal. The National Foundation for Credit Counseling estimates that 620,000 homeowners reached out to the agency looking for help with their home mortgage woes. And those are 2008 numbers, so the problem could easily be worse in 2009.
Yes, as a seller you’ll lose any equity you’ve built up in the house. But you also might save your credit rating and positioning yourself to buy another home if our financial fortunes shift for the better.
If you’re interested in selling your home in an assumable mortgage package, check your mortgage contract to see if you qualify. Get a lawyer to help, if needed, but look for clauses on your mortgage note that allow for an assumable transfer of the property.
You’ll also need the approval of your lender before you can transfer your property. And if you’re behind on your loan, then your chances of gaining approval are slimmer.
In tough times, getting a bad mortgage off your back is incentive enough in considering an assumable mortgage.
But getting the paperwork through, free and clear, is not an easy road – so you shouldn’t assume anything.
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