- Call/Text: 850.987.HOME(4663)
- 1805 Alhambra St. Navarre, FL 32566
Mortgage Loan Assumptions: A Smart Option for Buyers and Sellers
When you’re buying or selling a home the financing options can make a difference in the affordability and ease of the process towards closing. One lesser-known but potentially helpful option is mortgage loan assumption, which allows a buyer to take over an existing mortgage.
For buyers, assuming a loan could mean securing a lower interest rate compared to current rates. For sellers, offering an assumable loan could make their home more attractive to potential buyers. However, this process comes with specific requirements, qualifications and considerations. Let’s discuss.
What Is a Mortgage Loan Assumption?
A mortgage loan assumption allows a homebuyer to take over the seller’s existing loan, including the interest rate, balance and remaining repayment period. Instead of applying for a brand-new mortgage, the buyer essentially step into the seller’s shoes, continuing payments under the same terms.
This option can be highly advantageous when the interest rates are higher, as the buyer could assume a much lower rate than what’s currently available.
However, not all loans can be assumed. Generally, only government-backed loans allow for assumption:
- VA (Veterans Affairs) Loans
- FHA (Federal Housing Administration) Loans
- USDA (United States Department of Agriculture) Loans
Additionally, conventional loans are only assumed in rare cases due to a special clause in the mortgage terms. Not all lenders allow USDA loans to be assumed; it is important to check with your loan servicer before moving forward.
Can a Non-Veteran Assume a VA Loan?
Yes, but it’s not a good idea. If a non-veteran assumes a VA loan, the original veteran’s entitlement remains tied to that loan, therefore, they will not be able to use benefits to purchase another home until the original loan is paid off in full.
For this reason, many veterans prefer to have another veteran assume their VA loan, as it allows for a smooth transfer of entitlement.
Why Would a Buyer Want to Assume a Loan?
If the seller’s mortgage has a low interest rate, assuming the loan can save buyers thousands of dollars over the life of the loan. This is particularly valuable when market interest rates are significantly higher. Additionally, traditional home loans require extensive underwriting, private mortgage insurance and lender fees. An assumption can bypass some of these costs, making homeownership more affordable for the buyer.
The Loan Assumption Process: What Buyers Need to Know
#1. Does the Buyer Need to Qualify for the Loan?
Yes. Even though an assumable loan does not require a new application, the buyer must meet credit, income, and asset requirements set by the lender.
#2. Does the Property Have to Be a Primary Residence?
It depends on the lender. Some lenders allow assumptions on investment properties, while others require the buyer to live in the home as their primary residence.
#3. What Costs Are Involved?
While assuming a loan can save money, there are still upfront costs, including:
– Closing costs
– Escrow account setup fees
– Any applicable funding fees (VA loans require a funding fee unless the buyer is exempt)
Additionally, if the home’s sale price is higher than the remaining loan balance, the buyer must pay the difference in cash or secure secondary financing.
If you’re looking for a low-interest loan and reduced closing costs, assuming a mortgage could be a fantastic option. However, be sure to check with the loan servicer to ensure you meet qualification requirements.
What Sellers Should Know About Loan Assumption
If you’re selling a home and your loan is assumable, this can be a major selling point in a market with rising interest rates. However, there are a few key considerations:
The seller must continue making payments until the assumption is complete and closed. No missed payments are allowed. Additionally, veterans selling a home with a VA loan, it is important to request a release of liability from the VA once the assumption is complete; this process can take 45-60 days.
Upon closing, the seller will receive a refund of any remaining escrow balance.
Navigating mortgage loan assumptions can be complex, but with the right guidance by Navarre Real Estate Source, it can be a huge advantage for both buyers and sellers. Contact us today for a recommended mortgage lender we trust along the Emerald Coast.