With today’s very low mortgage interest rates, why on earth would any buyer want to assume the seller’s existing mortgage or better yet, why would a seller want someone to assume their current loan? Believe it or not, for the seller (what is my home worth?), it may be the difference between selling and staying put. For the buyer, It could be the difference between being able to buy a home or not. Above all, it definitely can mean thousands of dollars in potential savings for the buyer. Ask a question here…
What is a loan assumption? Simply stated, it’s when a home buyer takes on the seller’s existing mortgage under the same terms and conditions that the seller has, removing the seller from obligation under that loan.
- All FHA and VA loans are assumable and most of these loans have very low, attractive annual percentage point interest rates.
- Even if the interest rate is higher than what a home buyer could get today if they secured a new loan, there may be plenty of reasons to assume the seller’s existing loan.
Loan Assumption Scenario 1:
NOT ENOUGH EQUITY TO SELL WITHOUT A “SHORT SALE”
You want to move but either you don’t qualify for a short sale under the financial hardship guidelines and/or you don’t want to take the negative hit on your credit score by doing a short sale.
What can you do? You offer your home for sale with an option for the buyer to assume your existing FHA insured mortgage. Under a loan assumption, the buyer does not need a new appraisal.
- That’s right. They will buy the home for what you owe, plus selling expenses, subject to negotiation between the parties.
- Yes, the buyer will have to be financially qualified by the seller’s lender to assume the loan, BUT…with no appraisal and reduced fees, the buyer may find this an attractive option, especially if they might not otherwise be able to purchase it.
- Most important, what if the buyer is very qualified but has not managed to save up enough for a down payment or closing costs. If the seller has little or no equity and sells the home for the balance owed, the buyer gets the house they want with very little cash out-of-pocket.
Loan Assumption Scenario 2:
CLOSING COSTS ON A LOAN ASSUMPTION ARE TYPICALLY VERY LOW
You are a buyer and have good credit and very little cash saved. You would like to buy a home and don’t have enough for a down payment or closing costs for a new loan. You can look for a seller who has very little equity but wants to move from their current home.
- As a buyer, you can save thousands of dollars on a loan assumption since the closing costs run around .5% of the loan amount versus the 3-4% that it would cost if you were to secure a new mortgage loan.
- Even if you even have some cash that you could use for the purchase, you could find a seller with equity equal to or less than your available cash and apply all of your cash toward the down payment and your own equity in the home and avoid the substantial closing costs associated with a new loan.
- A key to this approach is to ensure that you evaluate the annual percentage rate (APR) on the loan you are assuming, compare that to the APR you could get for a new mortgage, factoring in the cost of the cash you’ll need for closing costs on the new loan and determine which one is more affordable.
Loan Assumption Scenario 3:
THE ASSUMED LOAN MAY HAVE A SHORTER TERM LEFT
Emerging from the mortgage crisis and the Great Recession, there are likely some sellers whose home value has not yet risen to a level to allow them to sell the property for much return. So, the term left on their current mortgage may be 27 years, 25 years or even less.
- Take, for example, a home in which the seller took out a $200,000, 30 year mortgage with a 5.0% APR five years ago when prices were at their peak. Perhaps the home is worth $190,000 today with the seller owing approximately $186,000 on their existing mortgage. For a $4,000 cash down payment, you qualify for and assume the existing mortgage. Your monthly payment would be around $150.00 more per month to assume the current mortgage versus taking out a new loan with an APR of 4.1% BUT…the house will cost you $8,500 LESS over the life of the loan with your home paid off in 25 years, instead of 30.
DO YOUR HOMEWORK
So, if you haven’t considered assuming the existing FHA or VA loan when shopping for a home, perhaps it’s time you did. As with any financial decision, it’s always best to consult your financial advisor, accountant or attorney on what is best for you. And, a good Realtor® can help you identify properties that will work, depending upon your situation. Ask a question here…