While attending a CBIP monthly meeting, I heard something that hit me like a tidal wave……the fact that many buyers can secure that super cheap interest rate that seems to be a thing of the past, simply by assuming the sellers’ current interest rate! What??? It’s true! In certain circumstances, such as a current VA loan, the buyer can assume that loan at the rate the seller is paying! And, the buyer doesn’t have to be a VET! Same is true on other types of loans.
So, I asked my mortgage buddy, AJ Doerr, of Hawaii Mortgage Experts, to share how it works. Maybe it will work for you!
What Is An Assumable Mortgage Loan?
- Assumable mortgage loans are a type of financing arrangement where an outstanding mortgage and its terms are transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid obtaining their own mortgage.
- With an assumable mortgage, a homebuyer assumes the current principal balance, interest rate, repayment period, and any other contractual terms of the seller’s mortgage. Rather than going through the rigorous process of obtaining a home loan from a lender, a buyer can take over an existing mortgage.
- There are only a few types of loans that can qualify as assumable loans, though there are some special considerations to keep in mind.
- Those types of loans which are assumable are USDA, FHA, and VA loans when certain criteria are met.
Important Facts to Keep in Mind
- The buyer does not need to be a military member to assume a VA loan.
- Buyers must still qualify for the mortgage to assume it (sufficient credit score, monthly debt-to-income ratio, monthly income, etc.).
- The contractual agreement for repaying the loan includes the interest that the borrower must pay, as well as the principal repayments to the lender.
Top Benefits of Assumable Loans
- Assuming a low interest rate when the mortgage rates are high (like the current mortgage market).
- Skipping the rigorous process of selling real estate and solidifying a traditional mortgage loan through a lender.
Potential Downsides of Assumable Loans:
- A major catch with assumable loans is the need for the buyer to bring in the difference between the loan balance and current home value. In other works, if the price of the house exceeds the remaining mortgage, the buyer must submit a down payment that is the difference between the sale price and the mortgage balance. If the difference is substantial, the buyer may need to secure a second mortgage which makes lender believe default is more likely.
- Sometimes, you need to wait the months it will take for the lender to approve the assumption. However, if you have a seller and buyer willing to wait, along with a buyer with available funds to cover difference, the wait will pay off with assuming a low interest rate saving monthly on your mortgage payment.
Please feel free to reach out to AJ directly with all your assumable loan questions. He’ll be happy to point you in the right direction! Thanks, AJ!
808.226.9421 | [email protected]
