Understanding the Concept of Assumable Loans
When purchasing or selling a house, there are several factors that need to be considered by all parties involved including: the purchase price, closing costs, and loan terms, which are the main points of negotiation.
Many buyers and sellers are not aware that they have the option to avoid certain financing complications by considering an assumable loan. Assumable loans provide the opportunity for home buyers to take over the existing home loan from the previous owner and continue making payments based on the original terms.
This type of loan is most commonly available for Veterans Affairs (VA) and Federal Housing Administration (FHA) loans. Although it is less common, some conventional mortgages also have a provision that allows them to be assumed.
In assuming a loan, the new buyer is required to pay the seller a lump-sum amount upfront, which is equivalent to the equity the seller currently has in the home. In cases where the seller has minimal equity, this could result in a significantly lower initial investment for the buyer. On the other hand, if there is a substantial amount of equity in the home, the buyer will need to come up with a larger initial payment. This payment can be made using cash or by obtaining a second mortgage.
For FHA loans originated before December 1, 1986, there is a Simple Assumption Process that allows for easy loan assumption without lender approval or credit check. For FHA loans originated after this date, buyers must go through a Creditworthiness Assumption Process. This requires meeting current qualification standards for a new FHA loan and obtaining lender approval.
VA Loans Buyers looking to assume a VA loan must have a reliable source of income and a satisfactory credit rating. Additionally, they must pay a fee equal to 0.50% of the original principal. If the loan originated after March 1, 1988, both the lender and the VA must agree to the assumption.
Potential Benefits to Buyers:
Assuming the original loan can be highly advantageous for buyers when the interest rates on the loan are lower compared to current rates or when the loan terms are more favorable. In some cases, buyers may also be able to avoid incurring closing costs and appraisal expenses.
Assuming a loan, which receives partial government subsidy, is a viable option even for non-veterans.
Potential Advantage for Sellers:
For sellers, having an assumable loan with favorable terms can serve as a strong selling point. This may enable you to ask for a higher price and make your home more appealing compared to similar listings without this option.
If you are struggling to make mortgage payments, allowing the buyer to assume your loan provides an opportunity to escape it without the need for refinancing or defaulting. This safeguards your credit from potential harm caused by foreclosure. Possible Drawbacks for Buyers Buyers may encounter difficulties due to the lack of choice when it comes to the lending institution.
The loan must be assumed from the seller’s original lender, meaning there are no other financing options if the buyer’s approval is not granted.
Possible Drawbacks for Sellers: As a seller, it is crucial to strictly adhere to the process and obtain an official release of liability from the loan. Failure to do so could result in being held accountable if the new buyer defaults. Sellers who permit the assumption of VA loans should be aware that, in most cases, they cannot obtain another VA loan until the original loan is paid off by the new buyer; this could affect your future ability to use the entitlement for buying homes.
In Summary:
When purchasing or selling a home, it is wise to ask if loan assumption is possible. Take the time to carefully examine the loan conditions and evaluate your personal situation to decide if this kind of loan is suitable for you.
Looking for more information about assumable loans?
We are happy to help! Contact Harlan Mayer, Owner and Principal Broker at 503-288-3979 or email at harlan(at)realestatepdx.com
FAQ:
Q: What is an assumable mortgage? A: An assumable mortgage is a home loan where the buyer legally takes over the seller’s mortgage and assumes payments right where the seller left off.
Q: When would an assumable mortgage make sense? A: An assumable mortgage might make sense in a variety of situations, such as when current interest rates are high, a buyer doesn’t have the best credit, there is a family death or a divorce.
Q: Are all home loans assumable? A: No, not all home loans are assumable. Conventional mortgages are not assumable. In general, only government-backed mortgages like FHA, VA, and USDA are assumable.
Q: What are the requirements for an FHA loan to be assumable? A: For an FHA loan to be assumable, the seller must have lived in the home as a primary residence for a specified period of time, and the buyer has to be approved through the standard FHA loan application process with small down payments of just 3.5% and minimum credit scores of 580.
Q: What are the requirements for a VA loan to be assumable? A: Although VA loans are guaranteed by the Department of Veterans Affairs and made to those who are current or former service members and spouses, VA loans can be assumed by those who are not associated with the military. The loan may have to be approved by the Regional VA Loan Center, which means a longer wait time, but the loan terms can be worth it.
Q: What are the risks of an assumable mortgage? A: The risks are typically greater for the sellers. If the transfer of the mortgage does not proceed properly for any reason, the seller may still be on the hook for the mortgage payment even though the buyer is now in possession of the house.
Q: Can buyers assume a seller’s mortgage without approval from the agency that backs the loan? A: No, in most cases, buyers must obtain approval from the agency that backs the loan to assume the mortgage.
Q: How can sellers protect themselves when allowing someone to assume their loan? A: Sellers should have buyers sign a release of liability after closing and provide proof to the VA, in order to protect themselves in case the buyer defaults on the loan.
If you need further assistance with assumable mortgages or any other type of mortgage contact us.
