It does not happen often, but occasionally a home buyer will take on the existing loan on the property they are purchasing. This is called assuming the loan and is only possible with VA and FHA loans. While most of these loans have an assumable clause, they are not typically exercised. In today’s day and age, however, if the rate and terms are better on the existing mortgage, it is to the buyer’s benefit to take the assumed mortgage. With rates on the rise now, who knows how high they will get in the future? This assumable feature may come in very handy for a great number of buyers.
How to Qualify for an Assumed Loan
The part that many home buyers do not like is that the qualifications for an assumed loan and a new loan are basically the same. The bank that holds the loan will still need to qualify you for the loan. This means pulling your credit, checking your income and employment history, and investigating your assets. They need to know that you can afford the loan and are responsible with your credit, just like they would want to know if they were providing you with a new loan.
Be prepared to show your paystubs, W-2s, bank statements, and to verify your employment. Everything that you do for a standard loan will be the case for an assumed loan. In fact, the timeframe for the loan approval is basically the same as a standard loan.
The Exception to the Rule
The only exception to this rule is for loans that were originated prior to 1989. If the seller has a loan that is an FHA or VA loan that started before 1989, there are no qualification rules. Any buyer can assume the loan whether or not they qualify, because the bank will not check the same qualifications. The only requirements for this loan are that the closing fees are paid, which includes the assumption fee that the lender charges.
A Seller’s Tool
Basically, the assumption factor is a seller’s tool to get the house sold. If they were lucky enough to get financing when the rates were at their lowest, they have a good marketing tool at their fingertips. Letting buyers know that they too can have this low rate that the owner originally got on the home is a great way to get buyers interested in the home. Who wouldn’t want to have a mortgage with a 3% interest rate? This could work to the benefit of many sellers as rates continue to be on the rise today.
You will have your work cut out for you if you do come across a seller with an assumable loan. You will have to figure out if it will work for you and if you will be saving money by doing so. The deciding factor will be the amount of equity that the owner has in the home. This is the amount of money that you would essentially have to put down on the home or pay directly to the seller. If you cannot come up with this sum of money, you would have to get a second loan and use it as a piggy back loan to pay the seller.
Sometimes assumable loans are more hassle than they are worth, but in the right situation, it can be a great deal. You need to crunch the numbers in your particular situation to see what is right for you including whether or not you can pay the down payment that is required.Click to See the Latest Mortgage Rates»