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How to Do a Mortgage Loan Assumption

Assuming a Loan Might Give a Buyer a Lower Interest Rate

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A loan assumption means the borrower will qualify to assume the loan.

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Loan assumptions were a popular financing option in the 1970s / 1980s but fell out of favor during the 1990s / 2000s. Appreciation was pretty strong during the latter time period. Lender requirements were more lax, and many buyers took out 80/20 combo loans.

Why Some Buyers Preferred a New Loan Over a Loan Assumption

  • Too Much Equity

    Part of the reason why loan assumptions were not utilized during '80s / '90s was because during the boom years, sellers had too much equity and buyers didn't have enough cash to bridge the gap between the loan and sales price. Many sellers were unwilling to do owner financing.

  • Interest Rates Were Lower

    Another reason that loan assumptions fell by the wayside for 20 years was because buyers usually could get a lower interest by taking out a new loan than by assuming the existing loan. It made little financial sense to assume a 7% loan when the bank down the street offered 5%.

  • Alienation Clauses

    The main reason very few buyers pursued a loan assumption from 1990 through 2009 was because almost every mortgage contained an alienation clause. An alienation clause in the mortgage gave the bank the right of acceleration in the event of title transfer.

Before Considering a Loan Assumption

The climate needs to be right for a loan assumption. There are generally two types of loans that will allow a loan assumption, and they are FHA loans and VA loans. Other loans typically call for payment in full in the event the home is sold to another buyer. Sometimes, buyers take title subject to and do not assume the loan. Buying a home subject to can be risky.

  • Compare Interest Rates

    When interest rates are higher than the existing loan's interest rate, it could make financial sense to assume the existing loan at a lower interest rate. The difference in a monthly payment on $200,000 at 5% versus 7% is $257 a month. Over 5 years, that's a savings of $15,420.

  • Compare Loan Fees

    Lenders are required to give borrowers a Good Faith Estimate or GFE. The GFE spells out all the costs associated with obtaining a mortgage. Generally speaking, buyers pay a lot more in loan fees to obtain a new loan than it costs to assume an existing loan. The difference could be several thousand dollars or more. Ask the bank to give you a statement containing its loan assumption fees.

  • Obtain a Beneficiary Statement and Copy of Mortgage

    Before taking the seller's word for it and spending money on home inspections, get a copy of the beneficiary statement to determine the unpaid balance of loan and whether the loan is truly assumable. In softer real estate markets, the difference between the unpaid balance and the sales price might be low enough that a 10% or 20% down payment will let you pay cash to the loan.

Tip: If the equity in the home is too high, consider consulting a real estate lawyer before engaging in so-called creative financing or owner financing.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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