As many homebuyers consider higher mortgage rates a deterrent to buying a home, some buyers and sellers are finding mortgage loan assumptions an option in today’s market.
Although not common, assumable loans are available with FHA, VA or USDA mortgages. In these types of transactions, the seller assigns the balance of their loan to the buyer and the buyer becomes responsible for the remaining payments. The upside is that the buyer gets the same terms as the previous homebuyer, including the interest rates and monthly payments. The downside is that the buyer will need to pay the difference between the mortgage balance and the purchase price in cash to the seller. This means the buyer will either have cash to pay this, take a second mortgage, or do both to pay the needed amount.
PAR First Vice President Bill Lublin has worked with assumed mortgages in the past when mortgage rates were double digits.
“When a buyer assumes the loan, they accept the responsibility of the previous borrower. Most assumptions are subject to the lender’s approval, though transactions subject to an existing mortgage without a due on sale clause are not,” Lublin says.
For example, if a buyer wants to purchase a $200,000 home and the current homeowners have a mortgage with $150,000 remaining, the buyer will need to pay $50,000 to the sellers to assume the existing mortgage.
Mortgage assumptions have been around for many years but have been getting more attention with the higher rates.
“The conversation about mortgage loan assumptions has certainly been more prevalent recently than ever since my time at NAR,” says Jeremy Green, NAR policy representative, Federal Housing/Advocacy Group. “They’ve become more of a topic of interest. They were popular the last time interest rates were this high, and we’ve seen statistics showing assumptions on FHA loans are on the rise.”
NAR board of directors approved a policy on assumable mortgages that supports policies, regulations and programs that enhance assumable mortgage products for federally insured loan programs (FHA, VA, USDA) and government-sponsored enterprises.
Both Green and Lublin stress that it’s important for sellers who have a VA loan to be aware that they may lose some or all of their entitlement for a future VA loan if they sell to a non-veteran until the remainder of the loan is paid off. If the VA loan is assumed by another veteran, they may be able to transfer it to the veteran buying the home.
Assumption Solutions provides webinars, podcasts and training for real estate professionals to understand working with assumable assets.