In Q4 of 2022, with interest rates rising, buyers had to get creative with financing. One potential option was an assumable mortgage. What is an assumable mortgage and how does it work? An assumable mortgage is one that the buyer assumes (takes on) from the seller. This might be an advantageous decision for a buyer because it allows them to take advantage of a seller’s lower interest rate (if rates have risen since the seller originally purchased the home). A key caveat here is that not all home loans are assumable, in fact, most conventional mortgages are not assumable. However, some FHA and VA loans are assumable as long as certain requirements are met and the buyer obtains lender approval.
For an FHA loan to be assumable both buyers and sellers must meet specific criteria such as the seller must live in the home as a primary residence for a certain period of time, and buyers must go through the standard application process of an FHA loan.
VA loans are available to eligible military members and their spouses, however a buyer who is not qualified as a military service member can still apply for a VA loan assumption. In that case the lender will also have the loan approved by the Regional VA Loan Center which may take additional time to process.
One major advantage of an assumable loan for the seller is that an appraisal is not required (this can also save the buyer hundreds of dollars). While assumable loans can be very beneficial for the buyer, they are not necessarily as beneficial for the seller as they have to do some work on the back-end to get lender approval and it may require certain restrictions for them. Additionally, the lender who has to approve the assumption typically doesn’t make money on the assumption (no new interest rate, no new client), so therefore, lenders aren’t keen on assumptions and they end up taking longer to process (anywhere from 60-120 days). Furthermore, the lender then may or may not allow for a second mortgage. Because of these limitations, many lenders are not willing to process assumptions.
To recap: Assumable loans can be beneficial for buyers, but they are limited in scope and can end up taking much longer to obtain. If you are interested in an assumable loan, you’ll have to work with the seller’s lender.
If you need help buying or selling, please reach out to us! Additionally, if you have any questions about financing, we work with excellent local lenders and we are happy to put you in contact with one of them.