Assumable Mortgages: Reality Or Pipe Dream?
I was recently working with a buyer who was interested in making an offer on a home. We ran the market numbers, they decided on an offer price, and we commenced negotiations. During those talks, an interesting thought came up: What if the seller’s loan was assumable?
What was their interest rate and current mortgage balance? Could this be a fantastic opportunity to get into a home with an exceedingly low interest rate and score a huge win for this family and their financial future?
We found out that the seller’s mortgage interest rate was below 3%; the loan balance was significantly large and close to a good Loan to Value scenario (LTV). This could be a life-changing event! According to Ryan Lindquist, a Sacramento appraiser and blogger:
“Assumable loans are eye candy in today’s housing market. The idea of taking over somebody’s 2.5% loan sounds amazing, right? It’s technically possible on paper for some loan types, but it’s challenging to pull off in the real world. Yet, if mortgage rates remain high, this is something we’re likely going to hear more about, so it’s important to know the process.”
It’s rare to assume a loan
I’m not a loan officer, so I won’t step out of bounds here, but it’s basically possible to assume an FHA, VA, or USDA loan from a current owner if the loan servicer is cooperative and everything else lines up between the buyer and seller. But, let me burst your bubble a bit here: We googled the idea immediately and learned that conventional loans are NOT assumable. UGH! This was confirmed by the seller’s lender, so that pipe dream blew up right away.
FHA, VA and USDA loans are assumable. (Yes, the USDA has home loans. A topic for another day.)
In short, it has to be the perfect storm of the right buyer, right seller, and right loan servicer to make an assumption happen.
UPDATED NOTE: A few people have said current FHA loans are not assumable, but everything I’m reading online from lenders and HUD seems to show FHA loans are assumable. My advice? Talk to a loan professional and the loan servicer. I defer to them.
However, I did learn more about assumable loans – and I think it’s an interesting topic that you may be interested in as well.
Biggest hurdles to assuming a loan
Paying the difference: The buyer has to pay the difference between the loan amount and the equity the owner has. This means if a property has a $400,000 loan, but it’s worth $525,000, there is a big chunk of change for the buyer to bring to the table. it seems like buyers putting 20% down are often decent candidates to assume a loan because they can absorb the difference between the loan and value in many cases.
It can take a long time: I mentioned loan assumptions in a Facebook thread a few days ago. I heard about one local loan assumption taking 5 months, another taking three months, or a quick one at 30 days. Look, maybe this process can be seamless once in a while, but can you imagine being in contract for five months without a guarantee of success? That is going to take a very particular seller and buyer, right? Moreover, if there are multiple offers, the seller is unlikely to choose the buyer wanting to assume the loan. This reminds us market conditions can either foster more or less loan assumptions.
The loan servicer isn’t always cooperative: There are situations where the loan servicer simply denies the loan assumption. One real estate agent told me loan assumptions are basically a buzzword because they’re difficult to pull off. Sounds about right.
Want to read more or see the cool visuals from Ryan? Check out his blog!
Ryan says: “My advice? Don’t put much hope in loan assumptions, but know how it all works so you can at least be aware of options. Like I said, it’s going to take the right buyer, right seller, informed real estate professionals, and a cooperative lender.
“When loan assumptions do happen locally, try to find out how the deal came together. The truth is buyers are starving to afford the market, and assuming a seller’s loan is going to help a small sliver of buyers out there. Ultimately, if rates remain high, this is going to be something more people are thinking about, and it’s possible we could see more loan assumptions ahead for that reason. If the market gets more competitive though, loan assumptions are the last thing sellers are going to target.”