Assumable loans are mortgages that allow the new home buyer to take over the terms of the seller’s mortgage. This means the existing homeowner’s interest rate, monthly payment, loan duration, and principal balance are assumed by the new homeowner.
The potential buyer must qualify with the mortgage servicer directly to assume the loan. Only the mortgage servicer can approve and close the new loan.
Assumable Loans Overview
An assumable loan is a type of mortgage loan that can be transferred from the current borrower to a new borrower. This means that the new borrower can take over the responsibility of making the loan payments, and the original borrower is released from their obligations.
Assumable loans have not been prevalent for the past two decades. Interest rates in the year 2000 were in the 6’s and 7’s. For the follow twenty years, the interest rates typically hovered around the 4% to 6% range. This meant that assumable loans didn’t offer much advantage since the rates were relatively flat.
Two decades later, COVID-19 hit and interest rates plunged into the 3’s. Fast forward two years and the post-COVID interest rates shot up to the 7%. Suddenly, assumable loans offer a competitive advantage to homeowners with low rates that want to sell their homes in a higher interest rate environment.
Some types of loans, such as VA and FHA loans, are always assumable, while others, such as conventional loans, may be assumable if certain conditions are met. The terms of an assumable loan may be different from those of the original loan, and the new borrower may be required to pay fees to assume the loan.
Only mortgage servicers can approve and close assumable loans. This means the Mortgage Mark Team won’t be able to originate the loan. But fear not! The team is still available to answer questions and provide counsel to ensure that a loan assumption is the most viable and economical option.
We recommend getting as much information regarding the potential loan assumption and then connecting with us. We’ll gladly review the paperwork and compare it to current mortgage options. As always, we want what’s best for our clients.
Benefits of Assumable Loans
There are obvious benefits to assumable loans. An assumable loan can save both time and money for the new loan.
The first (and most obvious) benefit of an assumable loan is that the buyer can obtain a lower interest rate if the seller’s interest rate is lower than the current market rate. A lower interest rate means lower monthly payments and less interest paid over the life of the loan.
The second benefit to assuming the seller’s mortgage is that the closing costs are typically around $1,000. By contrast, the estimated closing costs for a typical home loan costs thousands of dollars.
A third advantage to an assumable home loan is that a home appraisal is not required. This not only saves the buyer $550 to $700, but it also reduces the time and stress of the home loan process.
The final perk of an assumable loan belongs to the current homeowner. A seller with an assumable home loan will be able to advertise the assumable feature. This may increase the interest from potential buyers and warrant a higher sales price if market rates are significantly higher than the current mortgage.
Assumable Loans Gotchas
There are three major hurdles that may prevent a loan assumption. Those obstacles are:
- Not all loan programs are eligible for assumption,
- The buyer must qualify for the new assumption,
- The buyer may not have enough funds for the down payment.
1. Eligible Loan Programs for Loan Assumptions
The first roadblock may be that the seller’s home loan program isn’t assumable. Not all mortgages are assumable. The seller’s mortgage note will determine if a loan is assumable.
Government-backed loans – like FHA, VA, and USDA – are assumable. Likewise, conventional ARMs (adjustable-rate mortgages) are also assumable mortgage, but conventional fixed-rate mortgages are not assumable.
Caution Regarding VA Assumable Loans
For VA assumable loans, the new buyer doesn’t have to be veteran to assume the mortgage. However, the seller’s VA entitlement will remain with the home if the new buyer is not a veteran. The seller’s VA eligibility is only restored if the new buyer is also a Veteran and uses their entitlement for the purchase.
A Veteran seller that allows a non-Veteran buyer to assume their VA loan accepts two risks. First, the seller’s entitlement will remain in the home. This may prohibit the Veteran from obtaining 100% VA financing on a future purchase. Second, the seller will be at risk of permanently losing their entitlement should the new buyer default on the assumed VA loan.
2. Buyers Must Qualify for an Assumable Mortgage
The second obstacle is that the buyer (and sometimes the seller) must qualify for the loan assumption with the mortgage servicer.
Mortgage servicers aren’t mandated to automatically approve a potential buyer for a loan assumption. Every mortgage servicer will have their own guidelines and approval process. The potential home buyer will need to qualify based on the original loan’s program guidelines.
3. Buyers May Larger Down Payments
The last pitfall may be that the buyer may not have the funds available to cover the difference between the new sales price and the amount owed on the seller’s home loan. Depending on the sales price and the loan amount, this can be a sizable down payment.
Example of an Assumable Loan
Let’s assume Seller Sam bought his home five years ago for $300,000 using an FHA home loan. Seller Sam secured a 30-year-fixed rate mortgage with a 4.0% interest rate when he bought the home.
Today the home is worth $350,000 and Seller Sam’s mortgage balance is $260,000. Buyer Bob wants to buy the home for the $350,000 it’s worth today.
Current market interest rates are in the 6’s; therefore, Buyer Bob wants to assume Seller Sam’s FHA mortgage. This means that Buyer Bob would take over Seller Sam’s 4.0% interest rate for the remaining 25 years of the loan.
The “catch” here is that Buyer Bob will need $90,000 for the down payment based on the $350,000 sales price minus Seller Sam’s $260,000 loan balance. This is a significant down payment that Buyer Bob may not have accessible.
Assumable Loan Help
The Mortgage Mark team can’t originate a loan assumption, but we are able to provide feedback. We recommend the potential buyer gather information regarding the assumable loan from the seller and their mortgage servicer. Then contact us and we’ll be happy to provide feedback.
Loan Officer, NMLS # 729612