4 Things Everyone Should Know About Assumable Loans

Are you in the market for purchasing a home? Maybe you’re an agent looking to provide useful products to close your next sale. If that’s the case, you’ve definitely heard the term assumable loan pop up a couple of times. 

Assumable loans can be a great option for buyers looking to purchase a home without having to go through the process of obtaining a new loan. In simple terms, an assumable loan is a loan that a seller has, and a buyer can take over that loan instead of obtaining a new one. With approval, they can simply take over the seller's existing loan. 

However, there are misconceptions surrounding assumable loans, and it's crucial to understand the details before considering this option, risk getting rejected, or even falsely advertising a product that a buyer may not be eligible to use!

Here’s what you need to know about assumable loans before jumping into our latest lending update. 

Not All Loans are Assumable

The first thing to understand is that not all loans are assumable. In fact, the majority of loans that originated are NOT assumable. Conventional loans, which make up a large majority of loans done nationwide, do not have a clause that allows for assumption. 

Jumbo loans are also typically not assumable. Assumable loans are commonly limited to government loans like FHA and VA loans. While these loans do have a clause that allows for assumption, there are still eligibility requirements that must be met by the buyer to take over the loan. 

There May be Eligibility Requirements

In most cases, the new buyer needs to meet certain requirements to assume an FHA or VA loan. For example, for a VA loan, the new buyer will obviously need to be a veteran, active duty servicemember, surviving spouse, or other eligible individuals. 

You need to keep in mind, that the debt-to-income ratio (DTI) requirements for an assumable loan are more stringent than those for a new purchase loan. In some cases, the DTI requirements may be lower for an assumable loan than for a new purchase loan. That may be beneficial for some buyers who may not qualify for a new loan due to their DTI ratio. 

The Current Servicer Must Approve the Assumption

Even if a loan is assumable, keep in mind that the current servicer of the loan must also approve the assumption. This means that the buyer has to meet the servicer's requirements for assuming the loan, which may include credit and income requirements. In some cases, the servicer may only allow assumption in certain situations, such as financial hardship or death.

So, as a seller, if this is something that you want to explore as something that maybe could be an option for a prospective buyer, call your current servicer and be very direct about it. 

Agree on the circumstances under which they'll allow for assumption and get that information in writing. That way, you know specifically the circumstances under which they will even allow for an assumption to take place.

The Buyer May Need to Bring Additional Funds to the Table

If there is a difference between the loan amount being assumed and the purchase price of the property, the buyer will generally need to bring the differential amount to the table. 

This means that the buyer will need to provide additional funds to cover the difference between the loan amount and the purchase price. This can throw some wrenches in the process, making it difficult to obtain a second mortgage on the property, as many lenders may be hesitant to offer a second mortgage on a property with an assumable first.

Bottom Line

While assumable loans can be a good option for buyers, it's critical to understand the details and eligibility requirements before considering this option. 

Working with a knowledgeable real estate agent, title company, and lender can help you navigate the process and ensure that you make an informed decision. 

Be sure to tune into our February 2023 Lending Update for more information about loans (debunking myths and giving the facts) and how the current state of inflation and interest rates are opening opportunities for buyers!