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How Does a Loan Assumption Work?

how does a mortgage assumption work

A mortgage lender can handle the approval and processing of a loan assumption.

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Assuming the mortgage when buying a house can be a good deal if the interest rate on the assumable loan is lower than the rate you would pay on a new mortgage. An assumption also avoids a large portion of the closing costs associated with a new mortgage. Outside of mortgages insured by the Federal Housing Administration and the Department of Veterans Affairs -- which are all assumable -- most mortgage loans cannot be assumed.

Paying the Difference to the Seller

To assume the FHA or VA loan on a home you want to purchase, you must be willing to pay the difference between the selling price and the remaining balance on the loan. If the loan is older or the house has appreciated since the loan

was originated, the buyer may need to come up with a significant amount of money to be able to go through with an assumption. For example, if the home price is $200,000 and there is a $150,000 balance on the loan, you would need to pay the seller $50,000 to buy the home and assume the loan.

Credit Qualification Required of Buyer

A buyer who wants to assume a mortgage must meet the credit requirements of the FHA or VA. Any mortgage lender who handles these types of loans can process the assumption credit application. One potential benefit for assuming a mortgage is that credit standards for an FHA loan are lower than the requirements for conventional mortgages. The loan officer who takes the credit application and collects your information will let you know if the assumption is approved.

Release of Seller's Liability

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