Selling a home can be a challenge, even during a “seller’s market.” This is especially true for homeowners with properties that maybe need a little TLC, are located in a less-than-desirable area, or face other unique challenges. One way to boost your home selling strategy is to take a look at your current mortgage. If it’s an assumable loan, you may have your ticket to a quicker, more profitable sale.
What is an assumable loan?
Assumable loans are special types of mortgage products that can be transferred from the seller to the buyer. The two most common types of assumable loans are those backed by the Federal Housing Administration (FHA loans) and Veterans Administration (VA loans). Note that typically only older FHA loans may be eligible for assumption. Consult with a licensed mortgage professional for eligibility.
What are the benefits of FHA/VA loans?
FHA and VA loans both have unique characteristics that make them very attractive to buyers. They typically have lower interest rates and carry better terms than other conventional loans.
How does it work?
With assumable loans, the buyer can “take over” the seller’s existing loan without having to take out a new mortgage. The assumed loan stays the same, keeping the same terms and the same interest rate. Best of all, the buyer can take over the mortgage at its current balance. So, if the seller owes $150,000 on the mortgage, that is the balance the buyer would start out with.
What if the home sells for more than the owners currently owe?
It is quite likely that the home will be listed at a price above the seller’s current loan balance. In these cases, the buyer will likely need to pay the difference. So, if a buyer and seller agree on $200,000 for the home, and the seller owes $150,000 on their mortgage, the buyer will typically need to pay the $50,000 either in cash or through sub-financing. Because the price vs. mortgage balance difference can be steep, assumable loans are usually not chosen by first time buyers or buyers without much money to put down. For those types of buyers, it usually makes more sense to simply take out a new FHA or VA loan, especially since the down payment requirements on these loans are so accommodating (FHA loans usually require 3.5% down, though this is subject to change, while VA loans may require zero money down). During periods when mortgage rates are rising, the prospect of taking over someone else’s loan with a low interest rate can be a huge selling point. Additionally, buyers can save money by assuming the seller’s loan, as fewer settlement fees may be required and a home appraisal is not always needed (though buyers may want to have one done anyway).
What are the requirements?
In order to get a lender’s approval for assuming a VA or FHA loan, the buyer will still need to meet most of the other requirements associated with the loan program. For FHA loans, the buyer who is assuming the mortgage may still need to pay for mortgage insurance. However, buyers may not be required to pay the upfront mortgage insurance premium that would be required on a new FHA loan. Also, the buyer will need to prove their creditworthiness before being approved, just as they would if they were taking out a whole new FHA loan. The same goes for assumable VA loans.
The biggest restriction associated with most assumable loans, is that the buyer may have to use the lender that is servicing the loan. In other words, the buyer may not be able to “shop around” and work with the lender of their choice. For some buyers, this won’t be a deterrent, especially if the interest rate and loan balance are low. However, before assuming someone else’s mortgage, buyers should investigate the seller’s lender by reading client reviews and checking their profile with the Better Business Bureau.
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