What is an assumption?
assumption is an agreement by the buyers to take over the seller's existing loan at the time of purchase.
For example, let's say a property sells for $200,000. The buyer makes a $50,000 cash down payment and takes over the existing loan on the property in the amount of $150,000. The buyer uses the seller's loan to finance the purchase instead of getting a new mortgage.
Loan assumptions become popular when money is tight and home loans are hard to find. Assumptions are also more common when interest rates are high and during economic downturns.
A form of loan assumption (called a "work-out") is sometimes used to help buyers complete purchases of properties owned by financially distressed sellers. Normally a loan is assumable on the existing terms of the loan. This means the buyer agrees to pay the entire remaining loan balance over the remaining years of the loan and at the same interest rate and with the same monthly payment that the seller was paying. In cases where the remaining loan balance is higher than the market value of the property, some lenders will modify the terms of existing loans in order to facilitate a property sale and bring relief to sellers who are facing foreclosure. In order for this to happen, the lender must first agree to reduce the loan amount before the property can transfer title to the new buyers.
Lenders require borrowers to undergo complete loan qualification in order to assume a loan. The process is the same as it is with a new home loan except that an appraisal is usually not required. This reduces the upfront fees by several hundred dollars and it can cut the qualification time down. An assumption should take no longer than 21 to 30 days.
Not all home loans are assumable. Most adjustable-rate mortgages (ARMs) are assumable by a qualified buyer. Most fixed-rate loans are not, with the exception of FHA and VA loans. The fee charged to complete an assumption on most conventional home loans is 1 percent of the remaining loan balance. The fee to assume an FHA loan is $500.
FIRST-TIME TIP: With the recent rise in interest rates, it may make sense in some cases to consider assuming the seller's loan. Before doing so, contact the lender to verify the terms of the loan and the remaining loan balance. Find out what's involved in completing an assumption and how long it will take. Make your purchase contract contingent upon your approval of the existing loan. Be sure to read it. Also, make sure that a statement of condition of the loan is ordered from the lender so you can verify that the seller's payments are current.
THE CLOSING: It's risky to take over a seller's existing mortgage without the lender's approval. Most lenders have the right to call a loan due and payable immediately when they find out it has been taken over without permission.
Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif., 94618.