| An assumable mortgage allows a home buyer to not just move into the seller’s former house but to step into the seller’s loan too. This means that the remaining balance, repayment schedule and interest rate will be taken on by the new homeowner. When mortgage rates are as high as 7.5%, the assumable mortgage can be particularly attractive to buyers who could stand to save thousands by taking over a home loan at an interest rate below what’s currently being offered. Picture a home purchased in November of 2020 when FHA/VA rates hovered around 2.50%. Someone buying that home with an assumable mortgage in November 2023 could save about FIVE percentage points on their interest rate. The term also remains unchanged. Which mortgage loans are assumable? Only government backed mortgages such as the FHA and VA can qualify as assumable mortgages. Conventional fixed rate loans are not assumable. In addition to taking over the homeowners’ remaining debt the buyer will have to pay the difference between the mortgage balance and the home’s current value. How to assume a mortgage? Assuming a mortgage requires the Loan Servicer’s approval of the Lender servicing the loan on the seller’s behalf. If the buyer is assuming a $400,000 mortgage balance on a home that’s now being sold for $600,000, the new buyer will need to come up with that difference. The seller’s loan must be in good standing with their current lender. The new buyer also will be required to supply income, assets, and credit documents. Essentially it is like qualifying for a brand-new loan. The loan servicer is limited to collecting $900 as their fee to process the new loan paperwork. (This downside is creating a lag of lenders unwilling to process the assumption paperwork). Caveat: Coming up with a large down payment. Of my six Purchase Money Second Lenders that I’ve checked in with, none are willing to do a purchase money second mortgage behind an assumable first mortgage. However, if the buyer can come up with a large down payment, once the loan and property is transferred into their name, they could then seek out a HELOC or a second mortgage after closing to help put some funds back into their pocket or to replenish where funds may have come from to accomplish a large down payment. FHA mortgage insurance: Unless the loan to value was 90% or better at the time of the initial loan, the FHA mortgage insurance would stay with the loan for the lifetime. Upside – if you’re looking at a 2.5% interest rate versus a 7.5% interest rate then the amount of monthly mortgage insurance is really negligible. And on a VA loan, the veteran’s eligibility is tied up with the sale of that departing home. And although the veteran may be eligible for what we call Bonus Entitlement, in our “high value” California housing market, few veterans would likely qualify to finance their next home using their VA eligibility. I Recommend: If you are working with a seller that has an assumable loan, that they, or with your guidance, complete their due diligence to determine the process and the timing for selling their home on assumption with their current loan servicer. If you are working with a buyer and are searching for assumable loans, I would inquire with the listing agent and the seller about the same questions above. |
Sacramento Mortgage Lender 