Assuming a Low Interest Rate Mortgage Sounds Good – Is it? My mom always said, “If it sounds too good to be true, it probably is”. If it works for all parties involved it can be great. A lot of homeowners were able to secure interests rates below 3% on their home loan. I know of one homeowner with an assumable VA mortgage at 2.25%! Our area has a lot of military homeowners, and we are reaching the point where a lot of them with those nice low rates are putting their homes up for sale. If you’re looking to buy and hoping to assume a low-rate loan or looking to sell and planning to offer your low-rate loan, there are a few things you should know.
ARE ALL LOANS ASSUMABLE:
Most government loans are assumable, while private mortgages are not. That’s because many lenders include a due-on-sale clause in their paperwork. Examples of government loans are FHA, USDA, and VA. You need to check with whatever company is currently servicing your loan to make sure your loan is assumable.
Let’s start with buying a home where the seller is offering for you to assume their low interest rate loan. The house is being offered for sale for $500,000. They have a remaining balance on their loan of $350,000. You would assume the loan of $350,000 and you would need cash for the remaining $150,000. This is generally true. There are a few companies that have recently come about that will allow you to take a loan for the balance. But historically you cannot take a 2nd loan for the difference. You can “borrow” the money from yourself by taking out a home equity loan on your current home or borrowing from your 401K. Or perhaps you have someone who can “gift” you the funds. Just know the details before you get too excited.
You will also still need to have a credit check completed and pay closing costs. If a VA loan is involved, you will most likely have a funding fee as well.
Now for sellers. You need to check with whatever company is currently servicing your loan to make sure your loan is assumable. Don’t expect them to be excited about the prospect. If your loan is assumable and you plan to offer it with the sale of your home, you should know a couple of things. During the process, you will want to make sure that you receive a release of liability. You don’t want to be liable if the buyer who assumes your loan defaults. If your current loan is a VA loan you can offer it to any buyer. If the buyer is a VA buyer with enough eligibility, then they can use their eligibility and release yours. If you allow a non-VA buyer to assume your loan, it will keep your eligibility tied up.
TIMING COULD BE A FACTOR:
Buyers and sellers should both be aware of a timing factor. Typically, it takes about 30 days time from a house contract being accepted to the closing on the house. Occasionally this could take up to 45 days. When a mortgage assumption is involved, expect it to take longer. For a non-VA loan, plan on 60 days. If the loan being assumed is a VA, plan on 90 days. This extra time may or may not be a big deal, but you need to plan for it. As mentioned above, the servicer of the loan probably won’t be too motivated to move quickly. There really isn’t much incentive for them to do so.
Assuming a Low Interest Rate Mortgage Sounds Good – Is it? It can be. It just doesn’t work out for every situation. As a real estate professional, I keep informed on all things involving the selling and buying of real estate. If you or someone you know is looking to move or invest, I would love to help! Contact Me.