When you sell your home, youÂ should use every technique available to market yourÂ property. Price it appropriately for market conditions and get it in the best possible shape.
In addition,Â thereâ€™s one marketing tool that many homeowners forget they can use: an assumable home loan.Click to see today's rates (Mar 26th, 2017)
If you have an FHA, VA or USDA-backed mortgage, your buyers may be able to assume it. The biggest benefit for buyers in this rising-rate environment is that they can lock in a loan at your low mortgage rate, and pay less for it.
TheÂ biggest benefit for you is that assumability can entice buyers and get your nose ahead ofÂ your competition.
Your loan documents should indicate whether your mortgage can be assumed by your buyers. If your loan is government-backed, it's assumable under the right circumstances.
You mustÂ be current on your loan payments to offer an assumption.
Make sure you understand your loan terms and can explain them to your buyers. When they assume your loan, they agree toÂ all loan terms, including your mortgage rate, your repayment period, your payment and current principal balance.
The agency that backs your loan mustÂ preapprove your loan assumption.
An assumable home loan isÂ most attractive to buyers when the mortgage rate is low and the sellersÂ have little home equity.
That's because whileÂ buyers donâ€™t have to make a traditional down payment, they do have to pay the difference between your loan balance and the purchase price of the house.
They can do that with cash at the closing, or they may be able to take out aÂ second mortgage for the balance. However, not all lenders are willing to approve a second mortgage.
Your buyers also have to qualify for the assumption. They must submit a complete application package and documentation of income and assets.
Suppose your original loan balance was $200,000. If youâ€™ve been paying it for a couple of years at 3.0 percent interest, you owe just over $190,00. After four years, your balance would approach $180,000.
If you sell for $220,000, there is a difference between the current loan balance and the selling price, which the buyers have to cover.Â After two years, that would be $30,000, and after four years, it's $40,000.
On the other hand, cash outlays for an assumable loan can be lower than traditional financing. Some assumable mortgage terms allow buyers to forgo an appraisal and to pay reduced closing costs.Click to see today's rates (Mar 26th, 2017)
Your assumable home loan isÂ particularly attractive when mortgage rates are higher. Buyers may also be attracted by the idea of owning a house with an assumable loan that they can pass onto future buyers.
VA loans entice buyers because they donâ€™t require a Â down payment, and they donâ€™t require mortgage insurance. VA loans can be assumed by buyers even if they arenâ€™t veterans.
If you have a USDA loan, your buyers will have to pay an annual mortgage insurance premium of 0.35 percent of the loan balance. However, USDA mortgage insurance rates are lower than FHA mortgage insurance, which are 0.85 percent annually. For example, on a $100,000 loan balance, a USDA borrower would pay $29.17 per month.
FHA loans are popular in spite of their mortgage insurance, because they offer flexible underwriting guidelines.
There are a couple of caveats for sellers who want to use their assumable mortgage as a marketing tool. Itâ€™s essential to make sure you are released from liability for the loan to protect your credit.
You may not get this protection if you allow an assumption without the lender's pre-approval. Your lender mustÂ provide you with paperwork to legally release you from the loan. Then, if the buyers default, you wonâ€™t be held responsible for the balance.
If you have aÂ VA loan and your buyer doesnâ€™t have VA entitlement, your entitlement will be tied up until that loan is repaid. The VA loan benefit in that case remains with the mortgage, not you.
As long as youâ€™re aware of those two potential issues, selling your home with an assumable mortgage can be beneficial to you and your buyers.
Current mortgage rates are higher than they were before the November 2016 election. That's a factor that makes an assumable loan more attractive. However, today's mortgage rates are still affordable and low. If you buy a house without an assumable loan, it will be nearly as affordable today as it would have been a few months ago.Click to see today's rates (Mar 26th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)