I hope you now feel a bit more educated on the pros and cons of this product.
What and How are Loans Assumable?
Let’s start with what loan types are assumable. The general category are government-backed loans, which include FHA, VA and USDA. This means that if a seller is currently paying on one of these loan types they have an assumable mortgage. In order for another buyer to assume a seller’s mortgage, they must meet certain loan requirements that they would work through with the seller’s loan servicer to then assume that mortgage.
The criteria change by loan type and vary for each. FHA and VA are the more common of the three loans out there and even though these are primary residence purchase loans, you do not have to be a primary resident to assume these. However, FHA will retain its mortgage insurance, so you’re still going to be paying on that – which still may be worth it if the fixed rate is low enough.
A VA loan can be assumed by a non-veteran, but it’s not ideal. When a veteran buys a home, they use a percentage of their loan entitlement, which can be restored upon selling, which then allows them to purchase again using their VA loan. If a veteran allows their loan to be assumed by another veteran, then the buyer’s entitlement replaces the seller’s entitlement so that the seller moves on with their full entitlement intact. If a veteran seller allows a non-veteran to assume their loan, the veteran’s entitlement is still then tied up in that home and the loan performance can impact their record, meaning default from their assumed buyer could then jeopardize the selling veteran from using their entitlement in the future.
First Questions to Ask
As a buyer, the first things I’d ask are (1) What is the interest rate and loan type of the assumable mortgage? (2) What is the loan amount of the assumable mortgage? While we covered a bit of the first question already, the second becomes a key issue when it comes to the price of market.
If the seller has a $350,000 assumable mortgage with an attractive rate and terms but market price for that home is $500,000, then that creates a $150,000 gap that would need to either be cash and/or secondary financing (secondary, as the assumed loan would stand in first position and any additional financing then would take the second lien position).
The issue here is with the rapid appreciation of our market, most homes I’ve seen with assumption options have a large, six-figure gap from price point to assumed loan. If you just sold a home and have a chunk of change to cover the gap, then you’re one of the lucky ones! However, if you were just planning on your 5%-10% down home purchase, then this gap can be a bit troublesome.
Sure, you can look into getting a second lien, but those rates are typically higher than the 30-year fixed primary purchase market. So, depending on the math, you may be better off with a regular, current market first mortgage purchase than combining an assumable loan with a new second mortgage.
Assume You’ll Need Patience for Your Assumption
If you are one of the few whose stars align and an assumption makes viable sense to both buyer and seller, then the next step is talking to the seller’s servicer to have the buyer walk through the qualifying steps, then getting approved and fully closed on the loan assumption in the buyer’s name. Servicers are not really built and, in my experience, highly motivated, to help with these very efficiently so we do typically see more steps and longer approval times. I would certainly recommend reaching out to specific servicers for their quoted turn times. In my experience, instead of 30-day closings, I’ve heard more three- to four-month type scenarios.
I hope you now feel a bit more educated on the pros and cons of this product. I personally think these are a fantastic product but can be overhyped a bit when market conditions have positioned a big gap between loan amounts and values. Bottom line, talk to professionals, get the full details and give us a holler if we can help demystify the deal for you! FBN
By Chris Hallows
For additional information or to schedule an appointment visit ChrisHallows.Benchmark.us or call 928-707-8572. The Flagstaff location is 824 W Rte 66 Suite A-3.
Chris Hallows is the Branch Manager & Sr. Mortgage Advisor of Benchmark Mortgage Flagstaff. NMLS 306345 Ark-La-Tex Financial Services, LLC NMLS 2143 |Equal Housing Lender
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