If you fit the criteria to go this route, you’ll need to work with the current homeowner and their lender to get an assumable mortgage. Here are the steps to take to get an assumption:
Find homes for sale with assumable mortgages
This is a bit more complicated than shopping around for a standard mortgage. That’s because homes eligible for an assumable mortgage aren’t normally advertised as such. You’ll need to do a bit of sleuthing.
As only government-backed home loans are assumable, a good place to start is to get a list of properties in the area you’d like to buy that were purchased with either an FHA, VA, or USDA loan.
Use title companies
Title companies can create a list with names and addresses, which can help you whittle down a list of potential properties. From there, you can contact homeowners to see if they might be interested in selling their home through the assumable mortgage route.
Title searches aren’t free and can charge anywhere from $75 to $200.1 The cost hinges on a handful of factors, like the property’s location.
Search for MLS listings
For the unacquainted, the MLS is short for Multiple Listing Service, a database that real estate professionals create and run. While you need to have a real estate license to fully access the private database, there are also public ones you can run a search on.
When you do a direct search for properties that might be eligible for an assumable mortgage, you can read through the comments on property listings. Mortgage brokers can input in the comments section of their MLS.
Target properties with default mortgages
If a homeowner has a mortgage that might have defaulted, they might be more open to the possibility of an assumable mortgage. That’s because going this route can help them avoid foreclosure.
Approaching a homeowner with a mortgage that’s in default means you might need to have extra cash to make up for missed payments or hop on a repayment plan.
Search your mortgage contracts
Once you’re at the stage where you are reading the mortgage contracts of a property, see if you can find anything that might hint that the mortgage is assumable. To help you work through legalese, you can partner with a real estate attorney.
Get your documents ready
Because you need to get the mortgage lender’s approval and pass their qualification standards, it’s a good idea to have your documents on hand. The application will be similar to applying for a mortgage, and you’ll need to undergo a similar underwriting process.
Documents the lender will ask you to provide are to help verify your income and employment, assets and debts, credit history, and rental history, and may include:
- W-2 forms
- Pay stubs
- Income tax returns
- Alimony or child support documents
- Bank statements
- Retirement and investment accounts
Pay your costs and cover seller’s equity
While you’ll need to pay closing costs, the good news is that the closing costs on assumable mortgages are lower than the typical 2% to 6% on a standard loan.
Besides closing costs, you’ll also need to cover the equity the seller has built in their home. In other words, this is how much of the mortgage that’s been paid off, which will essentially come in the form of a down payment.
For example: You’re taking over a $300,000 mortgage, and the current owner has built $100,000 in their home (aka they’ve paid $100,000 off from their mortgage). You’ll need to either finance that $100,000 as a second mortgage or pay it out from your funds.
Second mortgages can be trickier. First, they tend to have higher interest rates. Why’s that? For one, should the loan default, the first mortgage is considered the primary mortgage and will get paid first.
Sign your promissory note
The promissory note is a written agreement in which one party promises to pay the other party a specified sum of money. Once you’re signed it, you’ve sealed the deal. It’s now official that you’ll take over the seller’s mortgage. The buyer is now free from all obligations of the home loan.