Assumable Loans: Your Secret Weapon to Unlocking 3% Interest Rates

Hello Hampton Roads,

If you are waiting on the sidelines for rates to drop before you venture into the market, assumable loans may be your ticket back in! Assumable loans could be your secret weapon to unlocking those coveted 3% rates that many home owners (aka potential sellers) are sitting on.  According to a Redfin article, approximately 62% of home owners have rate below 4%.

What's a Loan Assumption?

An assumption is where the buyer assumes the current loan balance of the seller at the same rate and terms. The buyer who assumes the loan becomes solely responsible for it as the seller's name and liability is released.  This is different from taking the property "subject to" which is when the buyer pays the mortgage but the seller is still on the mortgage and remains responsible for it. 

Types of Assumable Loans

In general, government backed loans like FHA, VA and USDA are assumable whereas conventional loans are not.  When buyers assume a loan they still have to be able to credit qualify for the loan and meet all lender requirements, however there is one exception with FHA loans that were originated before 1986.  FHA loans originated before 1986 generally have no restrictions on assumption. 

Pros of Loan Assumption

• The buyer gets at attractive rate below prevailing market rate and an affordable housing payment
• The loan costs are less expensive--there is no loan origination fee since you're not getting a new loan and if using a VA loan the funding fee is just 0.5% of the loan balance. Note that if the buyer has a service disability, the funding fee may be 0%.
• Anyone who qualifies can assume a VA loan (does not need to be a military buyer)
• Non -military buyers can assume a VA loan for an investment property
• For sellers, assumable loans make the property more attractive compared to the competition without assumable loans because it makes the home more affordable for qualified buyers

Cons of Loan Assumption

• This strategy works well for buyers with cash becuase a larger down payment is usually required. When a buyer assumes the loan balance the difference in purchase price must be covered and the easiest way to do this is for the buyer to cover the difference in cash.
• If the buyer does not have enough cash to cover the difference then a loan must be obtain for the balance. A lender who is willing to provide secondary financing charges a higher interest rate than the mortgage in first position and the result is a blended interest rate. The blended rate is usually better than the prevailing interest rate but the buyer and their lender can do due diligence to determine if it makes sense. 
• If a seller allows a non-military buyer to assume a VA loan then that seller's VA eligibility remains tied to the property preventing them from using it to purchase another home. 
• The time frame to close a loan assumption, is improving but can still take longer to close depending on the lender and if the buyer is obtaining secondary financing. Note VA recently came out with a new policy that loan assumptions must be approved within 45 days from when the servicer starts the application process. 

If you'd like to explore your options about buying a home in today's market, you can schedule a free, no obligation, call to discuss your real estate plans and the best way to achieve them: https://calendly.com/liz-schuyler 

Thanks for Reading,

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