Is an assumable mortgage right for you?
Are there any downsides to taking on a mortgage?
There can be downsides to taking on a mortgage, and it all depends on the circumstances.
Large cash down payment requirement
The biggest downside to taking on a mortgage is that a buyer may need more money than if they were applying for their own mortgage. One of the reasons for this is that if the seller has owned the house for a while, they may have equity accumulated, and the buyer should reimburse the seller for this capital. Even if he has no equity, the buyer will have to prepay any appreciation in the value of the house.
For example, if the seller bought a house 5 years ago for $200,000 and is offering it for $250,000 now, the buyer would take over the mortgage and reimburse the seller for any accrued capital, which in this example would be of $50,000. If he has the money in hand, the buyer will walk away with a good deal. Otherwise, they will have to take out a second mortgage, usually at a higher interest rate, but for a much lower principal.
Mortgage insurance payments
If the seller has made less than 20% down payment on a conventional home loan and sells the property before reaching 20% equity, the buyer will be responsible for this monthly payment for private mortgage insurance (PMI). The person assuming the mortgage can request the removal of the PMI once they reach 20% equity based on the initial payment schedule or by speaking with their lender to discuss any options they may have.
If you get an FHA loan, you will have to pay mortgage insurance premiums (MIP) instead of PMI. Unless the original buyer has made a down payment of 10% or more, the MIP remains in place for the life of the loan. If they made a down payment of more than 10%, the MIP is still paid for 11 years.
USDA loans have collateral fees that work similarly to MIP, although they are slightly cheaper. However, you are stuck with them as long as you have the loan.
VA loans have a one-time finance charge that can be paid at closing or funded in the loan rather than mortgage insurance. The finance charge is assumed to be 0.5% of the existing mortgage balance and is paid by the new home buyer at closing.
A special caveat for assumable VA loans
There is a special note for those who might be looking to have someone assume their VA loan. While anyone can take on a VA loan, even those without the usual military service required to get the loan initially, the only way to restore your VA entitlement so you can buy another home with a VA loan is to have the home taken over by another eligible active duty member, reservist, veteran, or eligible surviving spouse.
In this case, their right is replaced and your VA right is restored. If a civilian or ineligible service member assumes your loan, your VA entitlement cannot be restored until the loan has been fully repaid. In this situation, you will need to consider other mortgage options for buying a new home.