Ideally, a buyer enters the housing market with a pre-approved loan and searches for a home based on that loan amount with specific mortgage rates. However, with rising interest rates, a buyer may be looking for ways to obtain a lower interest rate. One of those ways is by assuming the seller’s loan.
Assuming the seller’s loan sounds like a great deal for the buyer, what is the benefit to the seller? The seller can now sell the property for more money because the buyer has a lower monthly payment.
The first hurdle that must be overcome is that the seller must have a loan that is assumable. However, not all mortgage loans are assumable. FHA and VA loans are assumable, but conventional loans are not.
If the seller has an assumable loan, then the buyer must get approval from the seller’s lender to take over that loan. If the buyer takes over the payments without approval, the seller is still held accountable for the loan.
Before receiving lender approval, the buyer must go through the standard loan approval process to qualify for the loan. Credit reports will be run, records of employment and everything a loan applicant goes through still takes place.
Assumptions have not been seen in over twenty years due to low-interest rates. With the recent rise in interest rates, assumptions are starting to come back. Many banks don’t have departments or people dedicated to this process, so this method of assuming the loan often takes longer. Expect the process to take at least 90 days.
When talking with Scott Mozingo, Branch Manager and Attorney for Highland Title + Escrow’s Manassas office, he mentioned that even with Highland Title + Escrow’s experienced attorneys who are familiar with the assumptions process, he has had settlements delayed as lenders work through the process for the buyer to assume the loan. Assumptions are often great options for buyers, but some steps in the process are out of their control. It’s important to understand all of the steps and that the length of the entire process could be extended for a much longer time in comparison to a traditional loan.
Something else to consider is that property value often increases. If the seller purchases the home for $400,000 but the value is now $600,000, where does the buyer get the difference of $200,000? It’s important to note that assuming a loan often means acquiring funds for a larger down payment. Lender programs are emerging to help buyers obtain a second loan to cover that difference, but it is always important to consider the interest rates before committing. In addition, if the buyer gets the loan from a different lender than the loan they are assuming, they must inform the lender.
Both buyer and seller want to ensure that the contract has proper contingencies and that releases are acquired where needed. A financing contingency should be in place should the seller’s bank turn the buyer down.
Any questions or thoughts regarding assumptions? Please feel free to contact us here.