Assumable Loans

An assumable loan is a mortgage that allows a buyer to take over (“assume”) the existing terms of a seller’s loan, including the interest rate, remaining balance, and repayment period. This can be advantageous when current market rates are higher than the original loan’s rate.

So to be clear you as the “assumee” take over the mortgage of the “seller” you then become responsible for that loan at its existing interest rate and terms. Which is an awesome route for obtaining a low interest rate mortgage ! The seller signs the balance over to you, while you compensate them for the amount they’ve already paid off.

Common Types of Assumable Loans

• FHA Loans (Federal Housing Administration)
• VA Loans (Veterans Affairs, for eligible veterans/military)
• USDA Loans (U.S. Department of Agriculture, for rural properties)
• Some Conventional Loans (rare; typically require explicit lender approval).

---

Process Overview:

1. Buyer Applies: The buyer submits financial documents to the lender for approval.
2. Lender Approval: Lender assesses creditworthiness, income, and debt-to-income ratio.
3. Assumption Agreement: Legal transfer of the loan, often requiring a fee (e.g., FHA: up to $900).
4. Deed Transfer: Property ownership is transferred to the buyer.

Key Requirements:

VA Loans: Non-veterans may assume pre-1988 VA loans; post-1988 require veteran eligibility.

The buyer must cover the difference between the loan balance and sale price (e.g., if the home is $300k and the loan is $250k, the buyer pays $50k as a down payment).

Check out the assumable loan calculator here

---

a. Liability

• Original Borrower: May remain liable unless granted a release of liability (common in VA loans).
• Due-on-Sale Clause: Most mortgages include this, allowing lenders to demand full repayment if the property is sold. However, federal law (Garn-St. Germain Act, 1982) exempts FHA, VA, and USDA loans from this clause during assumptions.

b. Documentation

• Assumption Agreement: Outlines transfer terms.
• Release of Liability: Protects the seller from future default risks (critical for VA loans).
• State Laws: Vary; consult a real estate attorney.

c. Risks

Lender Approval: Buyer must qualify under current underwriting standards.

Seller Liability: If the buyer defaults and no release is obtained.

---

For Buyers:

• Lower Interest Rates: Assume a 3% loan vs. 7% market rate.
• Reduced Closing Costs: No origination fees or appraisal costs (typically).
• Easier Qualification: May bypass stringent new loan requirements.

For Sellers:

• Faster Sale: Attracts buyers seeking lower rates.
• Competitive Edge: Stand out in high-rate markets.

---

Large Down Payment: Required if home equity is significant.

Complex Process: Requires lender coordination and legal oversight.

Limited Availability: Most conventional loans exclude assumptions.

---

Seller: Has a 3% FHA loan ($250k balance).
Buyer: Purchases home for $300k, assumes the loan, and pays $50k down.
Outcome: Buyer saves ~$800/month vs. a 7% loan; seller avoids higher closing costs.

Assumable loans offer unique opportunities but require careful navigation of legal and financial steps.

Recommendations:

• Sellers: Secure a release of liability.
• Buyers: Confirm loan assumability and prepare for a sizable down payment.
• Both Parties: Consult lenders and real estate attorneys to ensure compliance.

Final Note: In a high-interest-rate environment, assumable loans are a powerful tool for affordability and market flexibility.

Use the assumable loan mortgage calculator to determine your savings

---