There’s a lot of misunderstanding and confusion surrounding mortgage assumption. The ability to assume a loan is one of the things that make the VA loan program so great, but to take advantage of the benefits of loan assumption you first need to understand what it is. This article will go over what loan assumption is, the benefits of loan assumption, and how to go about either assuming or having your VA loan assumed. All VA loans are assumable, which puts them a notch above conventional loans because while conventional loans can be assumable, it is far from a guarantee.
What Loan Assumption Is
Typically, when you sell your home, the buyer goes to a lending institution, applies for a loan, waits to get approval, then pays off your existing mortgage with the proceeds from the loan that he or she was approved for. Because it’s a whole new loan, it will have a different interest rate and terms than the old loan. In many cases, the seller’s loan may have a lower interest rate than is currently available in the market. When this happens, it becomes very advantageous to a borrower to be able to assume a loan – and when you can offer something a borrower is interested in, you can attract more interest in your property. If you’re looking to assume a loan, remember that the purchase price is probably still going to reflect the fair market value of the home (unless you have a relationship with the seller), and you will be expected to pay out-of-pocket for the seller’s equity in the home. For example, if the home’s value is $200,000 and the seller only owes $150,000 on the home, you would most likely need to pay the $50,000 in cash to the borrower as part of the assumption. Sellers have the discretion of deciding whether to require that compensation and how much of it to require, so you’re at their mercy. While you can save a great deal of time, hassle, and money by assuming a loan rather than getting a new one, you may very well be required to put more money down when you assume a loan since the seller probably has more than 20% equity in the home.
The Benefits of Loan Assumption
The first and biggest reason people assume loans is to avoid the high-interest rates that may be offered at the time and get the low-interest rate that was offered at the time the seller got their loan. As of the writing of this article, it’s not the best time to assume a loan, since interest rates are still pretty low, but there are more benefits to assumption than just getting a lower interest rate. Assuming a loan cuts out most (if not all) closing costs, is much quicker, easier, and more casual than purchasing a home the ‘normal’ way. Assuming a loan also generally offers more flexibility in terms of negotiating the purchase price. Since the only amount you have to pay above the loan balance is determined by the seller, you have a lot of room to negotiate. No real estate agents, no commissions, and very little lender interaction.
First, get approval from the lender. I repeat, get approval from the lender. In case you missed it the first two times, get approval from the lender. If you’re on a VA loan, then your loan is assumable, but the new borrower still has to be credit-worthy and qualified for the loan that was made to you. You can still let someone assume the loan without lender permission, but you will still be liable for the loan balance in the event of default. In other words, if the person who assumes your loan doesn’t make their payments, the lender can (and will) come after you as vigorously as they come after the current borrower, even if this is 10 years from now. If you go through a lender to have your loan assumed, it takes a bit longer and there’s a bit more paperwork involved, but it’s still much easier than the buyer getting their own loan and buying the house the conventional way, and it provides some very important protection for you as the seller. When it comes to dealing with the VA, incomplete or omitted paperwork tends to come back to haunt you for years to come, so it’s best to just make sure that everything is kosher from the get-go.