The South Coast Real Estate Round-Up

Homeowners: Is your home loan assumable?

September 25th, 2013 11:40 AM by Christopher Terry

Recycling, Refurbishing, and Reusing are all the craze in today's budget conscious world. Preowned cars, yard sales, Craiglist, E-Bay all a great way to get what you want and save big too!

Why not recycle home loans? Sounds silly, but it's not, a buyer can take over, or "assume," a seller's mortgage in some cases. The process isn't easy, but both buyers and sellers should know what an assumable mortgage is, when it's desirable and who can benefit.

An assumable mortage allows the buyer to assume the rate, repayment period and principle balance as well as other terms of the seller's existing mortgage rather than obtain a new mortgage. There are two types of loans that are assumable: FHA and VA. Assuming an existing mortgage could be easier, simplier and less expensive than getting a new mortgage.

Rising Costs of Mortgage Financing

Let's facing it, interest rates are on the rise. If you purchased a home using an FHA or VA loan with a rate of 3.5% to 4.5% and in a fews years you decide to sell and the current rate is 1, 2 or 3 percent higher having an assumable loan becomes very attractive! The key for you as the homeowner is knowing if your loan is assumable, if a potential buyer qualifies to assume it and having a real estate professional who understands how to properly market the benefits to the buying public.

Lender Approval Required

Naturally, the buyer must apply and meet the lender requirement as if it were a newly originated loan. Without the lender consent the assumption can not take place. This restricts the buyer's choice of mortgage lenders to the current loan's servicer.

Other Considerations

Another benefit to a potential buyer is that often times an appraisal is not required. This could save the buyer hundreds of dollars. An appraisal can always be done independently by the buyer to lower the risk of overpaying.

Another concern is the seller's equity. If there is a lot of equity in the property then the buyer would need to come up with a large down payment to cover the diffence between the purchase price and amount of the loan being assumed.

Liability Release

The advantage for the seller is the property could be much more desirable to buyer's especially if the loan has a much lower rate than the interest rates at that time.

But there's a catch! The seller might still be responsible for the debt after the buyer assumes the loan. So if the buyer defaults the seller's credit could be negatively affected. So, if the seller's lender does not release the original borrower from the mortgage debt after the loan is assumed and the buyer stops making payments, the original borrower would suffer damage to their credit.

VA Loans

Veterans need to be aware the the VA entitlement maybe tied to the loan. So if the loan is assumed the original veteran may nt be able to use the VA entitlement on a new loan. VA entitlements are complicated, so service members are advised to call the VA loan center at (877) 827-3702 for assistance.

There are pros and cons for both buyers and sellers. We recommend having legal and mortgage advice before having a home loan assumed or assuming a home loan.  
 

Christopher Terry is a licensed real estate broker in Ma and RI, has completed the Accredited Buyer Representative Certification, is a graduate of the Certified Distressed Property Institute, holds the prestigious CDPE designation, is a 4-Time winner of the Master Sales Society's 5/50 Award and is the founder of EZ Home Search Real Estate Inc.
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Posted by Christopher Terry on September 25th, 2013 11:40 AM

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