Which Mortgage Loans Are Assumable?
We are getting questions about Assumable Loans again, as there are a lot of sellers with very low-rate mortgages selling homes in our current high-rate environment.
If those sellers could offer their low-rate mortgage along with the house, their house would no doubt be worth a lot more.
Up until the 1980s, many loans were “freely assumable,” meaning that a buyer could take over the full obligation of the mortgage from the seller – without even having to qualify.
But – lenders saw the potential risks involved with such loans and said “no mas” in the late 1980s.
Currently – the only loans that are assumable are FHA, VA, and USDA Loans.
No Conforming (Fannie Mae or Freddie Mac) or Jumbo Loans that I know of are assumable.
Two Kinds Of Assumptions
There are two kinds of assumptions: (1) Single Assumptions or INFORMAL ASSUMPTIONS; and (2) Novation or FORMAL ASSUMPTIONS.
Informal Assumptions typically involve no underwriting or lenders, as buyers simply take over payments. This is risky for the seller though because the mortgage remains in the seller’s name. So if the buyer is late with a payment, the seller’s credit will be impacted (severely). There are also WRAP AROUND MORTGAGE OPTIONS that I discussed in this blog in May.
A Formal Assumption requires buyers to qualify the same way they would qualify for any other loan via a lender and an underwriter – but subject to the terms of the seller’s promissory note. A Formal Assumption is much better for sellers, as it releases them from all liabilities (and credit risks) associated with the mortgage.
Down Payments/2nd Mortgages – To Cover Equity
If a buyer wants to assume a mortgage, she will also need to pay the seller for the equity that has accumulated. For example, if a seller has a $500,000 home for sale and an assumable $400,000 FHA Loan at 3%, the buyer would need to bring $100,000 to escrow to cover the difference between the assumable mortgage balance and the sales price.
The buyer can do this with cash or with a 2nd mortgage in some cases.
Will 2nd Mortgages Be “A Thing?”
Given that I expect rates to fall next year, I think assumable mortgages will not be a thing in the near future.
BUT – because so many macro-observers expect inflation to rear its head again in the future (which will push rates way up), I think the tens of thousands of homes with very low-rate VA and FHA Loans will all become excellent “assumable mortgage” options at some point in the future – if those homes end up for sale.
And – this is something every listing agent should consider, as offering a below-market mortgage rate along with a home will obviously make that home worth a lot more.
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