When you sell your home, you should use every technique available to market your property. Price it appropriately for market conditions and get it in the best possible shape.
In addition, there’s one marketing tool that many homeowners forget they can use: an assumable home loan.
Government Loans Are Assumable
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.
The biggest benefit for you is that assumability can entice buyers and get your nose ahead of your competition.
Do You Have An Assumable Home Loan?
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 must 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 to all loan terms, including your mortgage rate, your repayment period, your payment and current principal balance.
The agency that backs your loan must preapprove your loan assumption.
How An Assumable Home Loan Helps You Sell
An assumable home loan is most attractive to buyers when the mortgage rate is low and the sellers have little home equity.
That’s because while buyers don’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 a 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.
Assumption: The Math
Suppose your original loan balance was $200,000. If you’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. 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.
Assumable Home Loan Rates
Your assumable home loan is 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 don’t require a down payment, and they don’t require mortgage insurance. VA loans can be assumed by buyers even if they aren’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.
When Should You Avoid Selling With An Assumption?
There are a couple of caveats for sellers who want to use their assumable mortgage as a marketing tool. It’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 must provide you with paperwork to legally release you from the loan. Then, if the buyers default, you won’t be held responsible for the balance.
If you have a VA loan and your buyer doesn’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 you’re aware of those two potential issues, selling your home with an assumable mortgage can be beneficial to you and your buyers.
What Are Today’s Mortgage Rates?
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.