Once upon a time in the home buyer classes, I would talk about my first mortgage payment being at a 6.875% interest rate, and everyone in the class would gasp. Then I would get questions about why it was so high. I would laugh a bit, and say that in a more normal market… 6.875% is a great rate, and that in fact, my husband & I had been so very excited to get a loan under 7%! The class attendees would shake their head and just say that rates like that were crazy…. I would then pull my Chicken Little act, and tell them to prepare because the government wouldn’t be buying down rates forever.
Ah….the good ole days…. for awhile there I felt a bit like Cassandra because no one believed me.
…and here we are… Yes, interest rates have gone back up. Home prices are slowly adjusting. However, now we have something else that people haven’t heard of in almost 2 decades… Assumable Loans.
I have a client with a 2.99% assumable loan, and as soon as I put it out there I have received daily phone calls from realtors (and lenders) who have no idea what it is. Honestly though…why would they? The vast majority of Realtors and Lenders have been licensed for 10 years or less, and it simply wasn’t a thing. When interest rates were at an all time, historical, once in a lifetime, low… who cares if you could take over someone else’s loan at their interest rate? …especially if you could get a lower rate???
Well, again, how times have changed. Now, my interest rate of 6.875% on my first home sounds pretty good again, and assumable loans are back in fashion. So, what is an Assumable Loan? Let’s start with an example…
Let’s say I have a client who is selling their home for $500,000. They a current loan (that they’re making payments on) with an interest rate of 2.99%. Their loan balance is $375,000 and their current payment is $2,300 a month. They have owned their current home for 5 years, and have 25 years left on their loan.
For the right buyer, this is a deal of a lifetime! The buyer can ‘assume’ the sellers current loan of $375,000 owed, 2.99% interest rate, $2,300 a month payment, and only 25 years left on the loan…. so what is the catch, right? Well, the home is being sold for $500,000, so the remaining amount of $00,000 minus $375,000 ($125,000 for those of you without a calculator handy) would need to be made up with either cash at closing, or with a 2nd loan.
** The buyer isn’t just buying the home for the current mortgage owed on the assumable loan
(Sorry Peter who called me and yelled at me for 45 minutes that I was wrong and he just wanted to buy the home for the current amount owed on the assumable loan…. because obviously who wouldn’t?) That is not the way it works….
** When you assume the loan, you assume all terms of the current loan. You don’t get to assume the loan, and then change it to a different loan because there is mortgage insurance on this one. You can assume the current loan with the current terms, but if you want to change the loan type/terms…that would be refinancing…and you would lose the 2.99% interest rate.
(Sorry Linda who wanted to make an offer, but didn’t want to pay mortgage insurance, and couldn’t understand why she just couldn’t drop the mortgage insurance on the current loan, or assume the current loan … but with a different loan type)
So, if you are interested in a home with an assumable loan, there are questions your Realtor needs to ask…
1 – What type of loan is it currently?
2 – How many years are left on the loan?
3 – What is the current amount owed on the loan?
4 – What is the current interest rate?
5 – What is the current payment?
6 – Does that payment include mortgage insurance? Taxes? Homeowners Insurance?
If you decide to make an offer on the home, you and your Realtor make an offer just like on any home, and it is contingent still on the financing of assuming the current loan. There will be additional papers to fill out from the lender/servicer of the current loan. .
** Yes, you have to go through their pre-approval process, and be approved to assume the loan. Just like any pre-approval process when buying a home, they want to make sure you have a current job, acceptable credit score showing that you pay your debts, that you have acceptable debt to income balance for the loan you are trying to assume, etc. It is just like getting pre-approved for a normal loan.
(Sorry Wendy who was positive that an assumable loan was like a rent to own and couldn’t understand why she should have to go through a preapproval process when she just wants to take over the loan payments and rent to own the home until she can buy it. I let her know that my clients want to sell to pay bills and buy another home. She was shocked that the sellers would really want the money from the sell to pay off the other bills, and then who got nasty with me when I explained the process and told me that it was people like me keeping people like her down with my boot on her neck. I don’t wear boots?)
** If you do not have the cash to bring to closing to cover the difference between the assumable loan and the purchase amount (because, yeah…it is a lot of money and most people don’t have that in their couch cushions), the other option is to get a 2nd loan to cover the difference. This may not be the best option for many people because when the market crashed, a lot of people had 2nd loans, and walked away from them. The banks took a hit on this…. The 2nd loan will most definitely be at a higher interest rate than current market rate. How much? It depends on the buyer, the lender/bank that they are getting the 2nd loan from, and how much of a 2nd loan they are getting. Maybe you have some of the difference buried in a coffee can in the backyard, but not all of it. A 2nd loan may be able to help cover the difference. That is definitely something to talk with your lender about, and ask what other options they may have for you.
**No, the seller will not carry the difference so you can make payments on it.
(Sorry Jerry, who for an hour tried to explain to me why it would be a good idea for him to assume the loan at the amount owed, and for my client to carry the difference. He is good for it… he swore it to me. When I told him that the seller wouldn’t be able to purchase a new home without a down payment and that they would still be on the title for this home… he was so surprised that the sellers would still be on title. Sorry Jerry… you haven’t purchased the home if the seller is carrying the remaining amount. It’s ok though… Jerry didn’t want the sellers to be on title if they couldn’t take his word that he would make the payments…. sounds legit, right?)
Oh my friends.. the assumable loan is a great option for a lot of people, and you will be seeing so much more of them as interest rates continue to go up. Just like clothes and music, what goes around, comes around. If mullets can come back in fashion, it was only a matter of time before assumable loans did too. Pretty soon, Aqua Net & shoulder pads will be everywhere as well.
As great as an assumable loan is, it will not work for everyone. I think for people who are selling their current homes, using their down payment and assuming the loan of their next home might be a good option.
We will, I think, see other assumable loan options for even first time home buyers. If you are thinking about selling, ask your lender/loan servicer if you have an assumable loan. If you are buying a home, have your Realtor ask the sellers if maybe they have an assumable loan. Maybe the difference won’t be so great, but the rewards could definitely be worth it!