Assumability is one of the most attractive features practically unique to FHA, VA, and USDA loans in Orem, Utah, and other hot real estate markets in the United States.
As a buyer, having the option to take over someone else’s mortgage is beneficial on many levels. You can save a ton on interest if the rate of the loan you wish to assume is far lower than those you qualify for in today’s market. You may also deal with much cheaper closing costs since federally guaranteed loans have limitations on assumption-related fees.
To anyone hoping to attain home ownership the affordable way, mortgage assumption is undoubtedly worth the consideration. However, this option is not without pitfalls. Here are the dangers you need to worry about when assuming a seller’s mortgage:
The Lender Might Reject You
Like in a conventional home sale, three parties have to agree to the terms before the assumption can happen: the buyer, the seller, the mortgage lender. It is not enough to convince the owner of the property you wish to buy to say yes; you also need to get the lender’s approval. Without consent, you have no choice but to take out your loan to have funds to purchase the said house.
Since loan requirements may vary from lender to lender, you must possess the credentials the seller’s loan service expects from a borrower. Fortunately, FHA, VA, and USDA lenders have laxer demands compared to their traditional counterparts. If your qualifications are good enough to meet the general conditions of government-backed loans, chances are you will also charm the seller’s lender.
You Might Need to Pay a Lot of Cash Up Front
Mortgage assumption can minimize your out-of-pocket expenses except when the seller has a lot of home equity at the time of the sale. Unless the seller is desperate enough to be released from liability for the mortgage, you may have to pay the other party a substantial amount of cash to close the transaction.
Producing a large down payment is a dilemma most homebuyers share. Since you probably do not have tens of thousands of dollars lying around, you will need to take out another loan to access adequate funds. A second mortgage may carry higher interest and high closing costs and will be payable monthly along with the loan you want to assume.
In the end, you may not save money after all. If you find yourself in this tricky position, make sure to do the math to see whether mortgage assumption makes sense for you.
You Might Overpay for the Property
In mortgage assumption, an appraisal is optional, which may both decrease and increase the total cost you have to pay out of pocket. Skipping an assessment can save a couple of hundreds of dollars, but it augments the risk of overpayment. If the seller overvalues the property, you may part ways with more money than you are supposed to pay if you do not exercise due diligence.
Assuming a mortgage is not advantageous in most cases; nevertheless, you should not overlook it. If you find a seller struggling to repay an assumable mortgage with little equity, jump at the chance to buy a property for much less cash and stress.