Are you shopping for a new home and wondering what an assumable loan is and how it can benefit you? In this guide, we’ll answer all your questions about these loans so you can decide whether they are right for you.
What is an Assumable Loan?
An assumable mortgage, or an assumption loan, is one that a buyer can take over from the seller – with lender approval – of a home. This means the buyer agrees to take over the seller’s existing loan instead of independently applying for a new one.
What Are the Benefits of an Assumable Loan?
The main benefit of an assumable loan is that it allows the buyer to assume ownership of the home without applying for a new loan. This could save the buyer money in terms of closing costs and make it easier to obtain a loan with a lower interest rate, better terms, and more favorable repayment options.
How Does an Assumable Loan Work?
If the buyer and seller are willing to pursue an assumable loan, the lender must approve the transaction before completion. The process typically involves additional paperwork, such as a credit check and income verification for the buyer. Once approved, the buyer will have to pay off any outstanding debts on the original loan to the seller, and then they will become responsible for the remainder of the loan payments.
Are There Any Risks Involved With Assumable Loans?
As with any type of loan, certain risks come with assumable loans. One such risk is that if the buyer fails to make timely payments on the loan, they could face foreclosure or other legal repercussions. Additionally, buyers should know that lenders may attempt to raise rates or change other terms once a new borrower has assumed the loan.
Are Assumable Loans Right for Me?
Whether or not an assumable loan is right depends on your financial situation. If you are confident that you can make timely payments on the loan and can afford any potential changes imposed by the lender, then this type of loan could be a great option. However, you may want to explore other options if there is any uncertainty related to your financial status.
How Do I Qualify for an Assumable Loan?
To qualify for an assumable loan, you must meet a few qualifications. For starters, the person assuming the loan must have sufficient creditworthiness to assume the Seller’s obligations on the loan. Furthermore, the lender may require additional collateral or a higher down payment amount. Additionally, you must be ready to assume these payments once the transfer of ownership is complete.
What Type of Property Can Be Purchased with an Assumable Loan?
Typically, assumable loans are used to purchase single-family residences such as homes, condos, townhouses, and other residential properties. These properties must have existing mortgages that are eligible for assumption agreement between both parties.
What is a wraparound loan?
“This method of seller financing is risky if the underlying first loan has a “due on sale” clause because the loan might be called due when the first lender becomes aware that the property has transferred title,” says Dian Hymer, author of “Buying and Selling a Home, A Complete Guide,” Chronicle Books, 1994.
A seller usually will want to incorporate a late charge to encourage the buyer to make monthly loan payments on time. “A buyer will probably want to stipulate that prepayment of the loan is without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller…
“Most sellers prefer a due-on-sale provision included in the note, but this can be negotiable. Buyers who are concerned that they might be forced to sell during a period of high-interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer’s credit report and financial statement,” Hymer writes.
Are FHA loans assumable?
Lenders will only permit loans with a “subject to transfer” clause to be taken over through a formal assumption process. Look to your loan agreement for specific terms. In addition, you should candidly discuss any risks with your lender and possibly consult an attorney before signing the final agreement.
How do you find out if a loan is assumable?
Look to the loan agreement to determine if it is assumable by someone else. Then talk to the lender about specific requirements based on the home’s value.
Assumable loans permit one borrower to take over a loan from another without changing the loan terms. Such loans still exist but aren’t very common or popular (for buyers) in a low-interest-rate environment. Plus, today, new assumable loans are almost always adjustable-rate mortgages.
Do I Need Legal Representation to Assume a Loan?
Yes, it is recommended that you seek legal representation before assuming any sort of loan. An attorney can provide legal advice and guide you through the process of taking over an assumable loan from start to finish.