Assumable Loans - the secret to getting an affordable mortgage?
Is it a goal of yours to buy a home in the next 12 months? Upset you missed out on the historically low interest rates over the last two years? What if I told you there is a way you might be able to still get those low mortgage rates when you purchase a home RIGHT NOW? You might have heard of assumable loans and didn’t quite know what they were or how they work. In this episode, I am going to go over everything you need to know about what they are, how to qualify for them, the pros, cons, and some best practices if you are thinking of buying or selling a home using an assumable loan to lock in the lowest interest rate you can when buying a home in TODAY’S market.
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Josh Alexander
THE brokeredge
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Do you want to know the secret of getting a lower interest rate than anybody else in today's high interest rate environment, they're called assumable loans. And today, we're gonna go over everything that you need to know about this. So let's go ahead and get into it.
So over the last few months, more than any question that I've received, I keep getting asked time and time again about these assumable loan products. So I thought I'd make a special episode just dedicated to all things assumable loans, so we can go over everything you need to know. So we're gonna go over what an assumable loan is, what you need to do to qualify for it, and the pros and cons for both buyers and sellers, if you are going to go through with this assumable loan product. So let's go ahead and start with what the assumable loan is to begin with. So the easiest way to explain it is that a homeowner decides to sell their house, and they have a loan on the property.
So let's say they're selling the house for $800,000. And they still have a loan for $700,000. So there's $100,000 of equity in the property, what an assumable loan allows you to do is the buyer can come into that, and they can actually pay the downpayment of that $100,000. So whatever the equity is in the property, and they can assume the loan of whatever the seller has. So if the seller has a great rate of let's say, 3% on their interest rate, the new buyer gets that rate as well. And let's also say that the seller has been paying down that mortgage for five years. So when the buyer assumes that loan, they're not getting a 30 year mortgage, they're getting a 25 year mortgage, which means they can pay it off faster as well. So that's really just kind of the basics of what it is.
Now let's go over what you have to actually do to qualify. So on the selling side of things, if you think you're going to sell your house, the best thing to do to figure out if you qualify for this is one, you need to know what type of loan you have. Right now, FHA and VA loans are typically the only ones are going to qualify for this product. So if you have a conventional loan, typically it's not going to work because there's usually a due on sale clause in a conventional loan is basically says that you need to pay off the entire loan. However, on an FHA and a VA loan, they don't have that and they allow a new buyer to assume the loan as long as they can qualify. So as a seller, the first thing you want to do is talk to your lender. If it is an FHA or VA loan, and figure out if it is assumable, what is the process they have to go through typically, what lenders are going to ask you is they're going to ask the buyer to basically qualify to take over that loan.
So just like they would qualify for a new mortgage, they're gonna have to send in their credit scores, they're gonna have to go over their assets, their liabilities, their debt, to income, all that stuff to make sure they can financially afford to take over that loan. Now to make life simpler, typically sellers, you're going to want to do this before you even think about putting your property up for sale. That way, you can get all the details, get the specifics from your lender to figure out exactly what you need to do to be able to use this product. That way, you're not trying to figure it out, when you get offers on your house and you get into escrow and then going through the whole process, it's better to know exactly how your lender is going to require you to go through it. But typically, there's going to be some type of assumption package they give you for the buyer to fill out. And if the buyer qualifies, then they can go ahead and take over the loan.
So let's say as a seller, you talk to the lender, they say it is assumable. Really the only other qualification typically that lenders are going to have is that you need to be living in that property for a year before you go through and try to do this assumable loan. So if you've lived in the property for a year, and you have a VA or FHA loan, then typically there's a good chance you're going to qualify for this type of product. So it's definitely a good idea to talk to your loan servicer and figure out all the specifics you need before you go on the market. So that way you can market it properly, which we'll get into in a little bit. Now on the buying side of things to qualify. Like I said before, this is basically like qualifying for a loan. So if you're already pre qualified to have a loan, let's say of $800,000, and you're trying to take over this loan of $700,000, there's a good chance that you're going to qualify to be able to take over this loan, because they're going to use a lot of the same guidelines. So hopefully now you understand the basics of this assumable loan product and what the basic requirements are.
Now let's go ahead and talk about the pros and the cons for both buyers and sellers. So let's start with the pros first. Now on the buying side of things, it's pretty obvious, the biggest pro that you're going to have here is that you're going to be able to take over a lower interest rate that the seller was able to secure before interest rates went up. So let's say the seller purchased a property two years ago and got an interest rate of 3% You get to take over their payments on that 3% interest rate for the rest of the life of the loan. So that's obviously going to save you 10s of 1000s of dollars compared to today's interest rates that are hovering around 7%. So that's the most obvious financial advantage. However, there are more for the buyers. So on top of lowering your monthly mortgage payment and saving on a bunch of interest. When you go and purchase the property. You don't have to deal with a loan officer when you're doing this.
Typically, you're going to be dealing directly with the loan servicer, which means there's not going to be any lender fees and typically you don't need an appraisal as well. which is going to save you again hundreds, if not 1000s of dollars when you purchase this home compared to a standard sale. So again, that's just one more financial advantage that you have as a buyer when using this type of product. So the third and final benefit to buyers on this is going to have to do with the length of the mortgage. So let's say the seller has been paying that mortgage for five out of the 30 years, so they have 25 years left on the mortgage, when they do this and you take over the loan, you are not going back to a 30 year mortgage, you're just finishing up the payments on that 25 year mortgage, which means you're going to pay off your house five years faster than if you purchased a standard property. So not only are you saving on the interest payments, your mortgage payments every month are going to be lower because of that you're saving on a bunch of fees. But you're also often paying your house off earlier, especially compared to a standard 30 year fixed mortgage. So there is a lot of advantage for buyers to do this. So now let's go over the biggest advantage for the selling side of things when it comes to these assumable loans. And it really has to do with making your house more attractive to more buyers and today's market where it's harder and harder for sellers to get into escrow quickly and sell their homes.
Because interest rates are high, it has significantly tamper down demand right now, if you're able to advertise that any buyer that walks into your property can qualify can take over a 3% interest rate three and a half, four, four and a half percent interest rate, it's going to be extremely attractive to a lot of buyers and draw a lot of attention to your house, and often is going to result in having your house sell faster and for more money. So if you have one of these assumable loans, you're really sitting on a goldmine when it comes to being able to differentiate yourself compared to anybody else on the market. So this is why you need to make sure you're finding this information out before you go into escrow because it's going to be a giant advantage on the advertising side. So you and your agent can work together to develop that marketing plan to get as many people not only through your house and seeing your house as possible, but to understand what these assumable loans are, how the buyer can take advantage of it and really go through the entire process with any prospective buyers. So they know exactly what they have to do to qualify for these loan products. So those are the pros. Now let's go ahead and go over the cons.
Let's start with the buying side of things. So really the biggest con for buyers, is that typically, you're going to need to have a pretty substantial downpayment, because you're going to need to cover the cost of what they're asking versus what they have left on their mortgage. And obviously home prices have risen quickly over the last two years. So typically, home sellers are going to have a decent amount of equity in their house. So you have to be able to cover the difference. Now really the only way to get around this as a buyer, which again is not going to be for everyone and you have to run the numbers to make sure it actually makes sense. And that you end up still saving money. But often you're going to be able to take out a second mortgage to cover the difference in that equity versus the purchase price. And that way, you don't have to put the entire downpayment down. However, when you get a second mortgage, you have to realize that interest rates are typically going to be much higher for those. So again, the lender is going to need to run the numbers for you and see at the end of the day, every single month, does it make sense to do it this way is actually saving you money, that's going to be a case by case basis.
So if you don't have that giant downpayment, there is a way you might be able to still use this product. However, it does make things more complicated. And it's not going to work with every situation. So talk to your lender, figure out the numbers and see if it makes sense for you. So another disadvantage of this type of product, which affects both the buyer and the seller, is that when loan servicers do these typically it's going to take a little while to do and the timelines can be unpredictable. So if you're a seller, and you need to be out of your house by a certain date and into a new property, these type of products might cause some issues if the loan servicer is not responsive, and they can't give you a good timeline on how long it's going to typically take for this whole transaction to happen. So again, when you talk to your loan servicer, as a seller, you want to ask those questions. If I go through this, once the buyer submits the paperwork, how long does it take for them to get approved? How long can I get this thing closed? Because you want to know those timelines upfront.
So you don't run into issues down the line once you're already in escrow. And on the buying side of things. It's the same thing. If you need to be in a property by a certain time, let's say your lease runs out, or you've sold your last property and you're moving to this one, those timelines are going to be a little bit harder to stick by because it's not a traditional product. And especially right now, loan servicers have not been doing a lot of these over the last 15 years, because in an interest rate environment that's continuing to go down over the last 15 years, these products were just really not needed. However, now the interest rates have shot up and shot up dramatically. You're seeing more buyers being interested in this. Unfortunately, the loan servicers haven't done these a lot.
So it's going to take a little bit longer until these types of things become more commonplace. So again, you have to be patient, you have to know the timelines might be extended, and it might be harder to get an exact closed date with these type of transactions. So a third con to these products and this one affects the buyer more is that if the seller did use an FHA loan to get into the property Originally, they're typically going to have mortgage insurance, which means it's going to be a slightly higher interest rate. And that really doesn't fall off, you have to pay it for the remainder of the loan, unless the seller put more than 10% down originally, when they did the FHA loan, and then that will typically fall off right now at year 11. And then after year 11, your interest rate would go down even more. So it's something that you want to talk to the seller about, figure out what they put down, and then figure out if it might go lower in the future, if they put a significant downpayment down or if it's going to stay the same for the remainder of those 30 years.
So let's say it's a VA loan, well, typically, the VA loan usually has a fee up front, so the interest rate remains the same for the full 30 years. So that's typically not something you're gonna see change at all. Now, speaking of VA loans, let's go over con number four. So if you are a seller, and you have a VA loan, so your veteran, you get a VA loan, if the new buyer that's going to take over that loan is not a veteran doesn't use a VA loan, then you can run to issues purchasing your next house, if you want to be able to use a VA loan as well, because until that first house you have is completely paid off, it's going to tie up your VA loan entitlement and it's going to make it very difficult for you to purchase another house in the future using a VA loan until that's paid off. Now, if you were to sell to a veteran, so it goes from a VA loan to a VA loan, then that basically cancels itself out, the new veteran takes over that, and you get your full entitlement to be able to go out and use a VA loan again to purchase your next house.
So if you are using a VA loan, it's something that you want to pay attention to when a buyer submits a purchase contract just to see what type of loan product you're using. And you can weigh the pros and cons of that based on your financial situation, and what you plan on doing in the future when it comes to home ownership. So another con with this type of loan product on the selling side of things is if you do not get a release of liability signed by your lender saying that a resolve you have any type of liability with this new buyer, you could possibly still be on the hook for this property. If the buyer stopped making payments. The easiest way to take care of this is just to make sure when you're talking to your loan servicer, what paperwork do I need to fill out to get this release of liability? Most good loan servicers are going to provide that and make sure you sign that however, it's going to be up to you as a seller to make sure you talk to the loan servicer and say I need a release a liability form for this FHA or VA loan, where is it? How do I get it? Can you send it to me, let's sign it, make sure it's documented that way, if the buyer decides to stop making payments, you have absolutely no liability.
So it's an easy thing to solve. But it's something that if you don't pay attention to and it doesn't happen correctly during escrow, it could cause a lot of issues in the future for you. So make sure you look into that as well. Now the final con with this product is typically as a seller, you're not going to have the buyer fully qualified to be able to take over that loan until after you get an escrow because they have to fill out all that paperwork, the loan servicer has to make sure they're approved. And once they get approved, then they can qualify to take over the loan. But typically, you're not going to know that before you get into escrow. So it puts a little bit more risk on you, as well as the buyer too. Because as a buyer submits an application, they don't 100% know if they're going to qualify.
Like I said before, if the buyer does have a pre approval, and they're approved for a lot higher than whatever the loan amount they're taking over his odds are, there's a good chance they will qualify. However, it's not a sure thing until the loan servicer fully accepts it, because ultimately, it's up to them, who they're going to accept and who they're going to deny. So that is one more thing that you have to take into consideration as a seller and a buyer when you're thinking about doing one of these assumable loan products. Okay, so you know what these loan products are now you know what typically, you're going to have to do to qualify for them. And you have a good understanding of both the pros and the cons. The last thing I want to go over today is just kind of some best practices for both buyers and sellers, to properly utilize these to give you the highest success rate possible in either selling or buying your home. So let's start with the selling side first. So I've talked about it already. But the biggest thing for sellers is you really just need to make sure that you're talking to your loan servicer, if you have a VA or FHA loan, and figuring out all these details before you even think about placing on the market, typically at least a month ahead of time. So you have time to get all the paperwork you need.
As well as that you're going to give your agent enough time to be able to properly market this because they should be marketing this on every single channel they can, because it's a significant advantage compared to most homes out there. So if you don't have an agent that understands these assumable loan products, you might be better served to find one that does because it's something that's going to set you apart from everybody else. So you don't want an agent that doesn't understand this, because they're not going to properly market your house. And it's not going to give you as many offers. So now some best practices on the buying side of things.
So as a buyer, you're still going to want to go through the standard pre approval process from a lender for a few reasons. So number one, again, like I talked about the beginning, if you're able to qualify for let's say an $800,000 mortgage, and you find a property where you're taking over a loan that's maybe $700,000 You're going to know go Going in placing offers, there's a good chance that you're going to be able to qualify to take over that seller's loan. The second reason you're still going to want to talk to lenders get a few pre approvals to find the best rate is that I don't want to mislead you, these type of deals are not going to be 50% of homes you find out there, it's only going to be a select few. So it's going to take a while for you to find the right opportunity, it's going to make sense for you and you have to also understand, let's say the seller does have an FHA or VA loan, but they've been in the property for 15 years, odds are, they're going to have a significant amount of equity in the house, which means that you're going to have to come in with a giant downpayment, which just might not make sense for a lot of buyers.
So you're really going to have to focus on those homes that maybe were sold in the last two to five years, that aren't going to have a significant amount of equity in them. Because those type of homes and properties are going to give you the highest success rate with the least amount of downpayment required. So that is something that as a buyer, not only are you looking at the house, the neighborhood, all that kind of stuff, you also want to be pulling up when was this house sold last, because when you can find that information out, it's going to give you a better idea of how much equity that seller is typically going to have on their house and if this might work out for you or not. So make sure you're doing that alongside your agent as well when you're looking for these type of deals in the marketplace and the last tip for buyers, which is similar to the seller side is that you need to be working with an agent that understands these products and understands the advantage so they can be calling on your behalf and talking to every agent out there, figuring out what type of loan it is, how much left do they have to pay off and what their monthly payment is because again, you're taking over that monthly payment.
So typically, the seller is going to know what they're paying monthly on the house. So it's great information to have. So you can understand what your monthly payment is going to look like if you decide to get an escrow and you and the seller can come to an agreement. So make sure you have an agent that understands this and is going to bat on your behalf and asking all those specific questions to the seller. So that way you have more information to be able to make an educated decision on not only what you want to spend on the property, but how likely it is that you're going to be able to take over this type of assumable loan and make it fit within your monthly budget. So I hope you found today's information about these assumable loan products helpful useful and give you a better understanding that might be an option for you. If you are finding this content useful. And you want weekly emails giving you all the latest on what's going on in the housing market. Make sure you check out the description or the link in my bio, sign up for my weekly newsletter, where you'll get even more information more detailed breakdowns on what's going on for both buyers and sellers. And if you aren't already following me on social media, feel free again to check out the link in my bio or the description below depending on where you're watching this to get all those links as well and make sure you give me a follow until next time, stay healthy. Stay happy and I'll see you on the next show.
