Ask Andrew: Assuming A Loan
By: Andrew Goodman
Q: I just signed a contract that included assumption of a loan. My Realtor couldn’t really explain it and I was hoping you could.
A: The assumption of a loan is not very common these days, but could be in the next few years. The clause in the regional sales contract is referring to assuming the seller’s current loan. In other words, taking over the seller’s current mortgage.
A buyer, if he or she qualifies, may potentially be able to take over the seller’s loan if the loan can be assumed. This could benefit a buyer if the seller’s loan has a lower interest rate than what is available in the market at that time.
Right now, interest rates are low so most sellers don’t have a rate that a buyer would prefer over one that could be obtained in the current market place.
In order for the buyer to assume a loan, the buyer must still apply for a loan and meet all of the lenders qualifications as if he or she were obtaining a new mortgage. The lender must approve the buyer for the assumption to take place.
The concept behind the assumption for a buyer would be to obtain the seller’s current loan at a desirable rate and then pay the difference between that loan balance and the sales price via a larger down payment or additional financing (a second trust).
Currently, FHA and VA loans are assumable. In today’s market, FHA and VA rates are low that we haven’t seen many, if any, buyers assume a seller’s loan.
In the next few years, I expect a growing number of buyers to take advantage of a seller’s assumable mortgage as interest rates rise.
When rates increase, a seller with an assumable loan with a low interest rate may have a competitive advantage when selling over other homes for sale. A buyer may be more inclined to purchase a home where an assumable loan is available with a low rate versus another home where the buyer would have to obtain a mortgage at a rate on the current market.
There is a risk to the seller when allowing a buyer to assume their loan. The seller may be liable for the loan in the event that the buyer defaults. Be sure to release the seller’s liability in writing at the time of the assumption.
Please consult the lender of the loan before attempting to start the assumption process.