In some cases, buyers assume a secured loan from the seller, also known as an assumption. Instead of going out and applying to different lenders to acquire the money needed to purchase the home, the buyer can take over the seller’s loan already in place, including its interest rate. It’s an opportunity for a buyer to buy a home with a lower interest rate and monthly payments.
Sellers can benefit from assumptions. A seller will sell at market value…not the value of the loan… but the buyer has more buying power at the loan’s lower interest rate. If the seller’s interest rate is 3%, that rate follows that loan.
Assumptions are possible only if the seller’s loan is VA or FHA, not a conventional loan, and some disadvantages exist. A seller could have their VA eligibility tied up because of the assumption, which means their eligibility and ability to acquire another VA loan could be challenging. This is especially true if a non-veteran assumes the loan.
The buyer also needs to be able to pay for the equity in the property when assuming a loan. Let’s say the seller got a loan for $450,000 at 3%, and they got that loan five years ago. Over the past five years, they have been paying on the loan as the house’s value has increased. The seller won’t sell the house for the loan amount; they will sell it at a market value higher than the loan amount. If they decide to sell the home for $500,000, and the loan amount has been paid down to $400,000, then the buyer needs to come up with the $100,000 equity difference. This often limits the buyer’s options because they don’t have the cash necessary for the difference. On top of the equity difference, buyers will still have lender and recording fees when assuming a loan. The buyer will also need money to cover those expenses.
The buyer could acquire a second loan to cover the difference, but that loan would need to be approved by the lender allowing the assumption. They may or may not choose to approve that second loan. The equity needs to be covered by the buyer regardless.
Assumptions require a longer loan approval time. In the late 90s, assumptions were made quite often in the housing market. These days, lenders no longer have departments to handle these loans. The process could take as many as 70-120 days. The typical closing time for Northern Virginia is 30-45 days, so expect the loan assumption process to take significantly longer than a typical transaction.
Patience is key. In an assumption, the buyer talks to the seller’s lender. Buyers aren’t shopping for their loan, so the first step is the seller has to permit all parties involved to speak with each other. Once that is covered, the buyer can begin sharing their information with the seller’s lender, and the buyer must still qualify for the loan from a credit standpoint, and an appraisal will be done.
Bottom lines are on the move. Sellers are still making payments on the loan, and the lender is still charging interest daily, so the assumed loan amount is a moving target. Experienced industry professionals can get the numbers in the ballpark, but numbers will continue to move to the settlement date as sellers continue monthly payments and daily interest accrues.
Everything is prorated. The seller pays for everything up to the settlement date, and the buyer takes over after. Taxes and HOA fees will be prorated, and interest is charged daily and needs to be paid by the appropriate party. There is also the escrow account to consider. The buyer will inherit the escrow account once the settlement is concluded; the seller will need to be reimbursed for the escrow money from the buyer.
Choose an experienced title company. As assumptions are growing again, choose a title company that has experience settling with these types of loans. At Highland Title + Escrow, we pride ourselves on delivering smooth settlements regardless of your loan. Contact us today.