With the annual rising cost of housing coupled with higher interest rates than in year's past, the task of taking on a mortgage in this economy is more daunting than ever. However, as a potential new homeowner, you're not without options for finding the affordable home of your dreams!
Current Trend
One way savvy homebuyers tap into current trends is by buying a home with an assumable mortgage. This is when the current owner allows the buyer to assume their existing mortgage on the house. Buying a home with an assumable mortgage can save the buyer thousands every month.
Lower Interest
On the buyer's side, they'll be able to score a lower interest rate, especially if it is at least a few years old and was purchased when lower rates were more common. Additionally, buying a home with an assumable mortgage can lower closing costs and is ideal for buyers who are otherwise priced out of the market due to the significant difference in monthly mortgage payment when obtaining a new mortgage. For every 1% reduction in interest rate, there is a 10% reduction in mortgage payment! So the difference between buying a home with an assumable 3% interest rate and taking out a new loan at 7% would be approximately a 40% reduction in mortgage payment.
Reduced Closing Costs
When you assume a loan, whether that be VA, FHA, or USDA, the closing costs are slightly less than when you take out a new loan. Specifically for VA assumable mortgages, the VA funding fee is significantly reduced. The VA funding fee for a new loan ranges from 1.25% to 3.3% of the loan balance depending on down payment and the number of times the borrower has used their VA eligibility. With a VA assumption. The funding fee is fixed at 0.5% of the loan balance.
Additional savings are achieved given there is no new appraisal required for an assumption purchase. The existing loan's appraisal remains valid, thus the buyer saves on the cost in not needing to purchase a new appraisal. Finally, the lender's title insurance policy also remains in place, also saving the buyer potentially several thousand dollars in closing cost as there is no need to purchase a new lender's title insurance policy at closing.
Challenges of Loan Assumptions
Although a VA loan assumption offers significant benefits for buyers and sellers, there are some challenges to be aware of:
Finding Homes with Assumable Mortgages
It can be difficult to search for and find homes with assumable mortgages. One way is to ask your agent to canvas their available resources, including tax records to determine what homes for sale have an assumable mortgage. Another way is to use a dedicated search tool such as AssumeList - which allows agents and homebuyers to view all homes with an assumable mortgage in their market along with the home's interest rate, loan balance, and down payment information..
Longer Approval Process
It often takes longer to buy a home with an assumable mortgage than it does with a traditional purchase when taking out a new loan. This is because lenders who service these assumable mortgages need time to process the assumption. While it used to take on average 90-120 days to assume a loan in the past, current data suggests most assumable mortgages are being processed in 45-60 days with many now even being approved in 30 days.
Potential for a Hefty Down Payment
The down payment for assuming a loan is the difference between the loan balance and the sales price. During an assumption purchase you're taking over the seller's current loan and interest rate – which means that, if the seller has already paid down a large portion of their current mortgage, you may be required to make a significant down payment. That said, for those with the available cash to cover the down payment, the benefits far outweigh the challenges.
