At the beginning of 2022, we saw an unprecedented housing market. Demand was high, interest rates were close to an all-time low, and prices had skyrocketed. Now, at the end of October, we see that interest rates have doubled but the prices remain high. This has removed many buyers from the housing market. Now that the interest rates are up to 7%, an assumable loan with a lower interest rate looks enticing and could benefit buyers and sellers alike. However, I don’t know if they will make that great of an impact on our market.
WHAT IS AN ASSUMABLE LOAN
An assumable loan allows for a buyer to swap places with the seller and take on the responsibility of their mortgage. They will keep the same payment, the same interest rate, and the responsibility of fulfilling that debt. Once the release form is signed the seller will be completely free of the loan.
WHAT LOANS CAN BE ASSUMED
VA loans, FHA loans, and USDA loans are the most likely to be assumable, and the 30–year conventional loans will not be. Not every mortgage will be assumable and the best way to find out if yours is eligible would be to contact your mortgage company and get approval from your lender.
WHO CAN QUALIFY FOR A LOAN ASSUMPTION
Qualifying for a loan assumption is not much different from qualifying for a traditional mortgage. The buyer must meet the credit requirements and the debt-to-income requirements to be approved for a loan assumption. If the assumable loan is a VA loan, the buyer can be a civilian, however, the seller’s VA eligibility will be encumbered until the property has been paid off.
WHEN TO CONSIDER AN ASSUMABLE LOAN
Up until now, an assumable mortgage has sounded great. You’ll get a good interest rate and a good payment amount, but there is one thing that needs to be considered and that is the cost to assume. When a mortgage is going to be assumed, the seller is going to want their equity out of the loan. So, in order to close, the down payment could be extremely high if the mortgage has matured. (Say a home sells for $250,000 and the loan has $100,000 left. The difference of $150,000 would need to be paid at closing). Many people do not have that much cash to put towards the down payment, so a newer mortgage loan that has not been able to mature would be ideal to assume.
With the rising interest rates, I expect to see more inquiries about assumable loans. There will be cases where both sellers and buyers can take advantage, but I believe they will be rare opportunities. We still have many qualified buyers to compete with and a lot of people in our area have used conventional loans to purchase their homes. If you are really interested and think that an assumable loan is a correct route for you, speak with a real estate professional or your mortgage lender to come up with the best game plan!
