Let’s discuss a strategy buyers and sellers are using to avoid the current higher interest rates… VA Loan Assumptions.
A VA loan “assumption” is when a borrower takes over an existing mortgage, and it’s possible even if the buyer isn’t a military service member, veteran, or eligible surviving spouse. That means a buyer might be able to secure a lower-than-average interest rate, especially if the homeowner finalized their loan during a time period with lower rates. The potentially lower interest rate provides a tempting opportunity that may be worthwhile for some.
Getting approved to assume a loan is similar to getting approved for a new mortgage. You will need to complete an application, provide documents, and meet the lender’s credit, income, and financial requirements to get the loan assumption approved.
So, how do assumable loans work? An assumable mortgage allows a buyer to assume the rate, repayment period, current principal balance, and other terms of the seller’s existing mortgage rather than obtain a brand-new loan.
- If the assumable interest rate is lower than current market rates, the buyer saves money straight away.
- There are also fewer closing costs associated with assuming a mortgage. This can save money for the seller as well as the buyer. If the buyer is gaining a lower interest rate, the seller may find it easier to negotiate a price closer to the fair market asking price.
- No appraisal needed.
- The seller may also benefit from using the assumable mortgage as a marketing strategy to attract buyers. Not all mortgages are assumable, and the seller could get the upper hand over the market competition because they can provide the opportunity to lock in low interest rates.
- In some cases, they can even sell their home at a higher price because the lower interest rate offsets the higher principal amount.
- A buyer who assumes a mortgage may require a large amount of cash or to take out a second mortgage. If the home is valued at a price greater than the mortgage that remains on the home, the buyer must make up the difference. A home might be on the market for $350,000, but the mortgage to be assumed is only $200,000. The buyer will need to contribute $150,000.
- There are strict income and credit requirements for this loan type.
- Assuming a VA loan is NOT FAST. In fact, a mainstream lender quoted recently that the ‘average VA assumption take about 60 days’!
- The seller will remain liable on an assumed loan unless they’re released from the loan. The lender must sign an official home purchase approval and liability release document to do this.
How much does a loan assumption cost? Bottom line is that it varies. In most cases, the buyer must still meet strict borrower requirements in order to be eligible for the loan assumption. In many cases, a buyer must pay a fee – typically between 0.05% and 1% of the original loan amount to assume the loan. The assumption fee is the charge paid by the buyer who assumes a mortgage on a property. This fee most commonly occurs when someone buys a property that has not been completely paid off to the bank yet.
Who is liable for the assumption? When a buyer buys property and assumes a mortgage, the buyer becomes primarily liable for the debt and the seller becomes secondarily liable for the debt. “Assume” means the buyer takes on liability, and the seller is no longer primarily liable. “Subject to” means the seller is not released from responsibility.
How does the seller get released from the liability? The seller will remain liable on an assumed loan unless they’re released from the loan. The lender must sign an official home purchase approval and liability release document to do this.
If you are wondering if doing a VA assumption makes sense for you, give me a call. I would be happy to assist you in evaluating this option. And remember if you or someone you know is thinking about buying or selling, give us a call. Our team is on standby 7 days a week, 9am to 8pm, ready to help you take the smoother road to sold!
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