What is an Assumable Loan?
An assumable loan is a type of loan that a person can take over or assume. In such a situation, a person doesn’t apply for a brand-new loan. Instead, he takes over a loan that already exists. When a borrower takes over an assumable loan, he usually does not start fresh, with a new balance. He normally takes over only the current balance of the loan, and in many cases, the current interest rate.
Sometimes a person who opts for an assumable loan doesn’t have to qualify for it. This is not always the case, however, as there are also some loan programs that do require those who want to take over another person’s loan to qualify. Since some assumable loans allow the new borrower to assume the loan without qualifying, this situation is often seen as optimal for a person who has bad credit. For example, a person who has bad credit may have great trouble qualifying for a mortgage loan. If he can find a home with an assumable mortgage, however, he can take over the mortgage loan without having his bad credit impair him.
Besides taking on an assumable loan to circumvent credit problems, there are other factors that may make this type of lending situation attractive. In a mortgage situation, for example, a person who takes on an assumable loan can avoid the closing costs he would pay if he were taking on a first mortgage.
Interest rates can be a major benefit for someone who wants to take on an assumable loan. For example, an individual may want to acquire a loan for a property during a time when interest rates are high. If he can find and qualify for an assumable loan that was taken out during a low-interest period, he can pay much less interest than those who take out brand-new loans. Some lenders take steps to avoid having to offer lower-than-current interest rates when a person assumes a loan, however. Many include clauses in their terms that allow them to raise interest rates if a person assumes a loan; typically, this is referred to as a due-on-sale clause.
In most cases, taking on an assumable loan means providing some cash to the person who held the original loan or even taking out a second loan on the same property. For example, a person may take on an assumable mortgage of $80,000 US dollars (USD). If the property he purchases is being sold for $100,000 USD, however, he still has to ensure that the seller receives the full amount. In such a case, he may give the seller the rest of the money out of his savings or from another source. If this is not a possibility, he would usually have to take on another loan in order to meet the seller’s total sale price.
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