An assumable loan is a type of mortgage that allows the buyer of a property to take over, or "assume," the seller's existing mortgage loan, typically under the same terms. This means that the buyer agrees to make the remaining payments on the loan as if they were the original borrower. Assumable loans can be advantageous in certain situations, especially if the interest rate on the original loan is lower than the current market rates.
Here are some key points about assumable loans:
Eligibility: Not all loans are assumable. Generally, FHA (Federal Housing Administration) loans, VA (Veterans Affairs) loans, and certain USDA (United States Department of Agriculture) loans are assumable. Conventional loans often require lender approval for assumption. In addition, loans backed by government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, generally do not allow it.
VA: .5% Assumption Fee
FHA: $900 Assumption Fee
Approval Process: The buyer must typically meet the lender's qualification requirements to assume the loan. This often involves a credit check, income verification, and other financial evaluations, just like applying for a new mortgage. Also, the lender holding the assumption must approve any secondary loans or liens.
Interest Rate: The buyer assumes the existing interest rate, which can be beneficial if the rate is lower than current market rates.
Equity: The buyer must compensate the seller for any equity they have in the property. For example, if the seller has paid down a significant portion of the loan, the buyer might need to pay a lump sum upfront to cover that equity or get a secondary loan at the higher interest rate.
Costs: Assumable loans may involve lower closing costs compared to taking out a new loan, but there might still be fees for the assumption process.
Liability: In some cases, the original borrower might remain liable for the loan even after it's assumed by the buyer, unless the lender explicitly releases them from the obligation.
Assumable loans can be an attractive option in a high interest rate environment or when the seller's loan terms are particularly favorable.
Selling a home with a loan assumption involves a few specific steps, both for the seller and the buyer. Here's what the seller needs to do:
Steps for Offering an Assumable Loan for Buyers
1. Verify Loan Assumption Terms
Check Loan Documents: Contact your Loan Servicer to find out if your loan is Assumable
Review the existing loan agreement to determine if it is assumable. Some loans, such as VA, FHA, and USDA loans, may be assumable, while conventional loans typically are not.
Talk with your loan servicer for the following: to
Find out if your loan is assumable
Get the specific requirements and procedures, such as fees, interest rates, and terms
Obtain your Mortgage Statement —Note: this often does not have the accurate payoff mount and rarely shows forbearances
Notes
Deed of Trust
Pay Off Quote
Find out how much money is in the escrow account, if any
All of the above will need to be provided to a buyer within seven days of the effective date of the contract. Get all of the above in WRITING! Also, be aware that this process can take 90+ days to complete, so sellers and buyers must be prepared for this.
2. Qualify the Buyer
Lender Approval: The buyer must meet the lender's qualifications for assuming the loan, including creditworthiness, income verification, and other financial criteria.
Buyer’s Down Payment: If the loan balance is less than the home's selling price, the buyer must cover the difference, usually through a down payment or a secondary loan. The lender holding the assumption must approve any secondary loans or liens.
3. Inform the Buyer
Explain the Process: Make sure the buyer understands the loan assumption process and any financial implications, including the potential need for additional financing.
4. Provide Necessary Documentation
Submit Required Documents: Work with the buyer to submit all required documentation to the lender, such as the buyer’s financial records, an assumption agreement, and any other forms requested by the lender.
Pay Fees: There may be fees associated with the loan assumption, such as processing fees, which the seller or buyer may need to cover.
5. Coordinate with the Lender
Assumption Agreement: Ensure that a formal assumption agreement is drafted and signed by both parties, transferring the responsibility of the loan from the seller to the buyer.
Release of Liability: Request a release of liability from the lender, ensuring that you (the seller) are no longer responsible for the loan after the assumption is complete.
Taxes: If there is an escrow account, the balance is transferred to the buyer “with no deficiency” and the buyer reimburses the seller that money. If no escrow account, the amount of the property taxes is prorated to the closing date.
6. Complete the Sale
Close the Transaction: Once the loan assumption is approved, proceed with the closing process, including signing all necessary documents and transferring the title of the property to the buyer.
Update Records: Ensure that all relevant parties, such as the title company and tax authorities, are informed of the change in ownership.
7. Transfer Utilities and Property Information
Utility Transfers: Make sure to transfer or cancel utilities and inform the buyer of any ongoing property management or homeowner's association (HOA) obligations.
Property Information: Provide the buyer with any important information about the property, such as warranties, service records, or maintenance details.
8. Follow Up
Verify Completion: After the sale, verify that all steps have been completed, including the loan assumption and title transfer, and that you are no longer liable for the mortgage.
Selling a home with a loan assumption can be a complex process, so it's often advisable to work closely with a real estate agent and legal professionals to ensure everything is handled properly.
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