Let’s Talk Assumable Loans

So many people are talking about assumable loans right now, and with good reason. Before we break down some things to make note of about assumable loans, let’s talk about what it actually is!

Military and Veteran clients- make sure you read #6!

An assumable loan allows a buyer to take over the seller's mortgage, including its terms and conditions. So, they pick up where the seller left off, paying off the remaining balance and following the same terms set by the lender. Nice and straightforward, right? Well, not really, but we’ll get to that.

Why are assumable loans such an intriguing options for buyers and sellers? Think about it; all of those sellers who locked in interest rates in the 2 and 3% range may be getting ready to sell their home. Buyers are now looking at 6% and up interest rates! So if those buyers can keep that 2 to 3% rate and just take over the loan, they could save a significant amount of money per month on their monthly payment!

On the flip side, Sellers could benefit from marketing this option for their home.

But is it really that easy?

No… here are some things to consider.

1. The buyer is responsible for paying the equity built by the seller. Essentially, if the seller purchased the home for $200,000 and is selling it for $300,000 (market conditions, improvements, appreciation, etc.), then the buyer is responsible for bring $100,000 to closing to make up the difference of their new loan and what the home is worth now.
   
   For most buyers, this is really significant! You either have to bring the cash or you research other loans to bridge the gap. We’ll talk more about this option later.
   

2. The buyers have to go through the seller’s loan provider to take over the existing mortgage. They can’t shop for their own lender! With this can come some extra complications, because every loan provider likely has their own assumable loan department with their own set of rules on who will qualify for their assumable loan. That’s right, not every buy can qualify for an assumable loan. And just because one loan provider qualifies you, doesn’t mean another will.
   

3. The process takes a while… 2-6 months longer than traditional financing options. That means that the buyers and sellers have to be willing to work together and for a longer period of time to get to closing. The seller will likely have to provide as much documentation as the buyers! The current loan provider will want the process initiated by the sellers, and because there may no longer be a designated loan officer benefiting from this transaction, there may be less of a hurry to see the file get to closing.
   

4. Every mortgage company will have their own requirements for their assumable loan process. I touched on this above, but it’s important to understand! Read #2 for the whole scoop.
   

5. Buyers MAY be able to take out a bridge loan for the gap discussed in #1. SOME mortgage companies may allow buyers to take out a second mortgage of sorts to help pay the difference needed to close an assumable loan. That loan likely has a much higher interest rate than even traditional financing. Running your numbers for both scenarios can help determine if this second loan option is actually beneficial enough to go through with. So, buyers want to compare: assumable loan with bridge loan at higher interest rate VS. traditional financing options. Which one will actually save you money each month. And is it enough saved to make the process worth it.
   
   Of course none of that matters if buyers have cash to put toward the gap.
   

6. For VA Loan sellers/buyers! THIS IS IMPORTANT! For sellers who used their VA loan when purchasing their home, it’s highly recommended to find buyers who also qualify for a VA loan to assume your loan. Why? Because your entitlement will still be attached to the house which will effect your future VA loan purchases. Another thing to consider is if a non VA loan buyer assumes your VA loan (allowed), and the home is foreclosed on, it still effects YOU and your entitlement!

Assumable loans present a compelling option for both buyers and sellers in the real estate market. Buyers can benefit from lower closing costs and favorable loan terms, while sellers can attract more buyers, gain a competitive edge, and potentially sell their property at a higher price.

However, it's important for both parties to carefully consider the terms and conditions of the assumable loan, including any potential risks or limitations. Consulting with a real estate professional or financial advisor can help navigate the complexities of assumable loans and determine whether they're the right choice for a particular transaction.