When a buyer is looking at purchasing a home with a lower interest rate it may allow them the qualify for a more expensive home and save them money in interest payments.
With mortgage interest rates at 20 year highs some owners are gaining a competitive advantage of their low interest rates when offering their homes for sale and buyers are well advised to consider taking advantage of these offers to save money on the cost of purchasing and owning a home.
A mortgage assumption is when a home is sold to a buyer with an existing mortgage on the property. The average fixed rate mortgage in Jan 2021 was just 2.73%. Today some of the homes that were purchased in the beginning of 2021 are on the market for sale.
What is an assumable mortgage
An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a new buyer. The buyer must qualify with the lender in regards to credit worthiness and income requirements.
What types of Loans are Assumable?
Some of the most widely used mortgages are assumable and include loans back by the Federal Housing Authority (FHA), Veterans Affairs (VA), which serves our military veterans and the U.S. Department of Agriculture (USDA).
FHA loans are assumable when both the current owner of the property purchased their home with an FHA loan and the buyer seeking to purchase the loan is also using the FHA to obtain their loan. The seller’s lender will verify that the buyer meets their loan qualification before allowing the assumption to take place.
Our military veterans mostly obtain their mortgages which are backed by the Department of Veterans Affairs (VA). This type of loan will allow another military veteran or any other buyer that did not serve in the military to assume the loan.
USDA loans usually require no down payment and often have low interest rates. However, these loans are only available in designated rural property areas. The new buyer must still meet all the loan requirements such as good credit and enough available income to assume the loan.
Steps to Assuming a Mortgage
Home sellers must reach out to their existing loan provider to start the process and get approval. Once the seller has received approval for a loan assumption they can put the home up for sale and advertise the possibility of the loan assumption.
One caveat to this process is that the home seller should make sure that they will be relieved of the obligation by receiving a release on their liability once the new buyer assumes the loan. If they do not receive the release of liability the seller could be held liable if the new buyer should default on the new loan, leaving the seller liable for the unpaid balance.
Advantages and Disadvantages of Assumable Mortgages
The advantage to assuming a loan when interest rates are high, like they are currently today than in the past few years then a buyer would be well advised to seek out and if possible assume the mortgage to save money on interest payments throughout the life of the loan and potentially allow the buyer to qualify for a more expensive home.
The disadvantage is home owners may have built up substantial equity in their home and will be selling the home for more than what the buyer will be able to assume. For example, a home owner wants to sell their home for $200,000 and advertises they have a low interest rate assumable mortgage. For illustration purposes let’s say they owe $150,000 on their loan. The new buyer will only be able to assume the existing balance of $150,000 at the low interest rate. This leaves the new buyer with two options. They buyer would receive a loan for the $150,000 and would have to come up with the difference in cash of $50,000 or take out a second mortgage, typically at today’s interest rate to make up the difference.
The Bottom Line
When a home owner has an existing assumable mortgage when interest rates are higher currently than when they purchases their home this gives them a couple of advantages. The may be able to command a higher price for their home and it allows more potential buyers to qualify for the home.