What Is a Home Loan Assumption?
A home's seller can offer a loan assumption to a borrower. The buyer will take the seller's place on an existing mortgage. If the lender approves the process, it can be a streamlined way for a new buyer to move into a home.
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Advantages
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An assumable loan can release a debtor who can no longer afford a mortgage from having to repay the debt. The debtor can sell the home and the mortgage debt in one step. The new borrower will typically get a discount on the home.
Warnings
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Some assumable loans are offered in "short sale" scenarios. In a short sale, the home owner has stopped making mortgage payments and is attempting to release the asset and the loan. The new borrower may find the underlying mortgage requires unexpected payments.
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Example
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In a depressed real estate market, a home's sale price may not cover the mortgage, creating a problem for a seller. The mortgage market is tight, so the buyer may have trouble getting a loan. The mortgage lender knows this could lead to default on the loan, so the lender agrees to allow a loan assumption, solving problems for all parties.
Criteria for an Assumable Loan
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The new borrower will typically have to pass the mortgage lender's application process to determine creditworthiness. Good credit, a consistent source of income and other requirements may be needed to assume a loan.
Assumable Loan Lenders
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Not all lenders will allow a loan assumption, but most traditional lenders will given certain circumstances. Even loans guaranteed by the U.S. Department of Housing and Urban Development can be assumed if the new lender meets the criteria required.
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References
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