The Truth About Assumable Loans
The Good, the Bad and well, I’m not sure they are ugly but I think it’s important to know how they can (or can’t) help you.
The truth? Assumable loans can really help a buyer and a seller out, if the situation is right.
How can they help a buyer?
Well, let’s just say you are a “move-up” buyer and that you have equity. You can sell your house, and use that equity to cover the gap on an assumable mortgage (that’ll make more sense as you read below, see 2.Equity payment). Essentially being able to “assume” someone else’s low interest rate in a high interest rate market.
How can they help a seller?
Marketing power baby! If interest rates are at 7% but you can market your house with an assumable loan of 3%, that saves the buyer money and can set your house apart from the rest.
The truth is, assumable loans can be a GREAT option for buyers and a GREAT marketing tool for sellers. But what many people don’t realize is that they can come with a very high down payment and not all loans are assumable.
Essentially, the buyer will have to pay the difference in what the seller owes and the price the buyer is purchasing the home for. If the seller has a lot of equity, that COULD be a potential problem for a buyer, unless you have that loads of cash hidden under your mattress…and you might. Or a lender may be able to offer an option for this, such as a second mortgage, but then, would you really be saving money on that initially low-interest option???
Anyway…let’s dive in and uncover this intriguing option.
What Is an Assumable Loan?
An assumable loan is a type of mortgage that allows a buyer to take over the seller’s existing loan, including its terms, interest rate, and remaining balance. Instead of the buyer securing a new mortgage, they “assume” responsibility for the seller’s loan.
Not all loans are assumable. Conventional loans typically are not, but government-backed loans such as FHA, VA, and USDA loans often are.
Why Are Assumable Loans a Big Deal?
- Low Interest Rates
If the seller secured their mortgage during a period of low-interest rates, the buyer could potentially assume the loan with a significantly lower rate than what is currently available. For example, if the seller has a 3% interest rate and current rates are 6%, the buyer could save thousands over the life of the loan. - Cost Savings
Buyers can save on closing costs, as assuming an existing loan might be less expensive than obtaining a new one. Plus, lower monthly payments can make the home more affordable. - Attractive for Sellers
Sellers with an assumable loan have a unique selling point. A low-interest loan can attract more buyers, making the home more competitive in the market.
How Does the Assumption Process Work?
The process isn’t as simple as a handshake—it involves approval and legal steps. Here’s how it generally works:
- Loan Approval:
The buyer must qualify with the lender just as they would for a new mortgage. This includes meeting income, credit, and debt-to-income ratio requirements. - Equity Payment:
If the seller owes less on the mortgage than the home’s sale price, the buyer must pay the difference upfront or secure secondary financing. For example, if the home sells for $300,000 and the seller’s remaining loan balance is $200,000, the buyer needs $100,000 to cover the gap. - Lender’s Approval:
The lender must approve the loan assumption. This typically involves a formal application and fees, which vary by lender.
Things to Watch Out For
- Equity Requirement
Buyers must have cash or access to financing to cover the difference between the loan balance and the home’s sale price. This can be a challenge if the gap is significant. - Loan Restrictions
Not all loans are assumable, and even if they are, the lender’s approval is required. Some loans may have restrictions or added costs. - Seller Liability
In some cases, if the buyer defaults on the assumed loan, the seller could still be held liable. ***Sellers should confirm with the lender that they are fully released from the loan after the assumption. - Market Value Disparities
If the market value of the home drops below the loan balance, assuming the loan may not make financial sense for the buyer. - High cash cost to cover the difference As mentioned previously, the difference between what the seller owes and what the house is selling for will have to be made up somewhere.
Who Benefits Most from Assumable Loans?
- Buyers in a High-Interest-Rate Market:
Assumable loans can be a lifeline for buyers when rates are high, making homeownership more affordable. - Sellers with Low-Interest Loans:
If you’re a seller with a loan locked in at a low rate, marketing your home as having an assumable loan can make your property stand out. - Veterans with VA Loans:
VA loans are assumable, even by non-veterans. This can be a major perk for buyers looking for affordable financing. *Be sure to check VA loans thoroughly so that everyone keeps their current VA loan statuses.
Final Thoughts
Assumable loans are a powerful tool in the real estate world, offering buyers a way to save on interest and monthly payments while giving sellers an edge in the market. However, the process can be complex, and you definitely want to be educated on the pros, cons, and processes.
However, thinking outside of the box for potential opportunities is a great way to get things done.
My theory, it’s yes until it’s no, so why not push forward on all potential opportunities?
***Disclosure: I am not a lender, nor an attorney. I don’t give lending advice, nor legal advice. Consult a lender and or attorney before deciding on an assumable loan.
If you’re considering buying or selling a home and want to explore how an assumable loan might work for you, let me know, I have a website that shows me assumable loans.
Let’s discuss your options and create a strategy that fits your goals.
Contact me today, and let’s talk about making your next move easier and more affordable.
Jane Askew, Real Estate Agent, Brokered by KW Ellis Co.
