Tuesday, August 22, 2023

So you have a low interest rate on your home and want to sell -- is your mortgage loan "assumable" by another buyer?

Lately I have been chatting with a lot of homeowners who are considering selling their Sacramento homes, and a question I keep getting asked is: "Can the person who buys my house take over my 3% mortgage loan?" 

The short answer to the question is MAYBE. Some mortgage loans are what we refer to as "ASSUMABLE" and under certain conditions the loan and its interest rate and terms can be transferred to a new purchaser. An assumable mortgage allows a homebuyer to take over the seller's home loan, and best of all, the new buyer may keep the original mortgage interest rate. Having an assumable mortgage can be a great selling point when marketing a home for sale! With current interest rates in the 6-7% range (depending on qualifications, loan type, terms, etc), and a lower interest rate environment in the years prior, the ability to offer a low mortgage interest rate to the next owner can really set your home listing apart from others.

The longer answer to this question is more nuanced and way more complicated.

First and foremost, not all loans are assumable. To determine if a home buyer can assume your loan, we need to know what kind of loan you have since usually it is only government-backed loans that are assumable. By government backed loans -- this refers to if your loan is insured by FHA, VA, or USDA. If you are not sure what type of loan you have, refer to the NOTE or CLOSING DISCLOSURE documents from when you purchased or last refinanced your home. Both will describe the loan type and if the loan is assumable. Page 4 of the loan's Closing Disclosure has a checkbox section at the very top that specifically states if your loan is assumable or not. Conventional loans and Jumbo loans that are backed by Fannie Mae and Freddie Mac typically are not assumable. If you are unsure what sort of loan you have, you can call me (or your agent if you are already working with someone) and I can help you figure it out.

If your loan is not assumable, then NO. You will not be able to transfer your loan to another buyer. Game over. Do not pass GO. Do not collect $200.  Clearly, you may still sell your home, though the buyer will have to get their own loan at today's market rates. And there are plenty of Sacramento home buyers doing just that.

Second, if you determine that you do have a FHA, VA, USDA, or some other loan type that is assumable, the next step is to determine what your interest rate and your unpaid principle loan balance is. Your interest rate will be on your Note or your Closing Disclosure if you were able to track that down. You might also find this information on your most recent mortgage statement.

Third, once you determine you have an assumable loan, you know your interest rate and unpaid principle balance is -- next, you and your agent need to contact your loan servicing company. Do this proactively! Most loan servicers have a special document package they will SNAIL MAIL to you. Do this BEFORE your home goes on the market. It could take days or weeks to arrive. Again, need help navigating this? Contact me.

So you have an assumable loan, you know the balance and interest rate, and you have your package from your loan servicer...ok, now you can list your home for sale and market it to have an assumable loan. Which is awesome! But I do want to stress to you that new home buyers must still qualify and be underwritten by the loan servicer (buyers are not free to work with a lender of their choosing on an assumption), there are some drawbacks to this scenario. Listing agents must carefully vet buyer offers who seek to complete a loan assumption. The loan assumption will not work for everyone, and here are a few examples...

Example #1: You purchased your home for $400,000 in 2015, and your current unpaid principle balance on your loan is $355,000. Your home is worth $580,000 today. In order for a buyer to be able to assume your $355,000 loan, they will need to have approximately $225,000 in cash as a downpayment. That would equate to nearly 40% down, and most buyers will not be able to do that.

Example #2: You purchased your home for $500,000 in 2018, and your current unpaid principle balance on your VA loan is $475,000. Your home is worth $625,000 today. You are elated to find a buyer with 20% down who can easily assume the $475,000 loan...however this buyer is not a veteran. As a VA loan seller, you may choose to allow a non-veteran assume your VA loan, however unfortunately then you lose your VA loan eligibility in the future -- until that loan is paid in full. Once paid in full, your VA eligibility is restored...though it may not be restored in a timeframe that works for you to use a VA loan on a future home purchase.

Example #3: You purchased your home for $600,000 in 2020, and your current unpaid principle balance on your loan is $560,000. Your home is worth $700,000 today. You are elated to find a buyer with 20% down who can easily assume the $560,000 mortgage...however, your loan servicer takes 4 months to manually underwrite the new buyer's loan. The buyer must snail mail their financial documents to the lender. Every few weeks the lender asks for new documentation and the process drags out. That replacement home you were hoping to purchase is no longer available. The buyer gets frustrated, or finds another property, and walks away. Some loan servicers take A LONG TIME to process and underwrite loan assumptions because they do not have a dedicated team working on them.

Whichever end of a home sale or purchase you are on, please do not hesitate to reach out to me if I can assist. These are nuanced transactions.

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