How to Assume Seller's Loans (Mortgage Assumption)

How to Assume Sellers Loans Mortgage Assumption

You came here to find out how sellers loan assumption works and we’re about to answer that real estate question.

When you assume a seller's loan, you take over their existing mortgage. That includes the current balance at the time of transfer, the interest rate, and all other terms of the loan. 

There are a few reasons that a seller’s loan assumption can be an advantage for buyers. For one, taking over someone else’s mortgage means that the buyer doesn’t need to obtain their own. That being said, only some types of mortgages are eligible for this kind of real estate arrangement. 

We’ll talk about that in the next section. 

Loan Assumption

You’ll need to calculate the cost of loan assumption - Photo from Canva

Fully Understand Seller Loan Assumption in 2 Minutes

By now, you know the classic steps toward home ownership. 

Find a home, secure a mortgage, and make the initial payments before moving in.

But if you decide to assume the seller’s loan, then some benefits present themselves:

  • You avoid the search for lenders and the lengthy process of mortgage approval.
  • You could take over a lower interest rate from the previous homeowner’s mortgage.
  • You may take over a fixed interest rate, shielding you from rising rates.

Of course, loan assumption means that the new buyer must take over the principal payments, plus the interest. Also, the original homebuyer may have accumulated equity through years of their mortgage payments. As the prospective buyer, you’ll need to compensate the homeowner for this equity.

California Home

Loan assumption has pros and cons - Photo from Canva

Which Types of Loans Can You Assume From Sellers?

Now that you know how loan assumption works, which kinds of loans/mortgages can be assumed?

  • Federal Housing Authority (FHA) 

Both the buyer and seller must meet the requirements to be eligible for an FHA loan assumption. For example, the property should be the primary home of the seller. They will be the responsible party until the loan is signed over to you.

  • Veterans Affairs (VA)

You may think that only military or ex-military can apply for loan assumption of a VA mortgage, but you’d be wrong. However, to qualify for one of the assumable home loans from a VA member, you must be approved by the VA loan office in the region. Pre-1988 VA mortgages do not need this approval. 

  • U.S. Department of Agriculture (USDA)

As you might guess, the Department of Agriculture offers loans to rural property owners. No surprise there. Oftentimes, they have quite low-interest rates. Anyone who wishes to take over this kind of loan must meet certain credit and income requirements. On top of that, the USDA must approve the title transfer. You may acquire the existing terms, or have new rates and terms offered to you. 

Pros and Cons of Loan Assumption

There are clear advantages to assumable home loans, but disadvantages present themselves too.

Potential advantages of loan assumption:

  • Lower interest rates.
  • Avoid applying for a new mortgage.
  • Low upfront investment if the homeowner equity is low.

Potential disadvantages of loan assumption:

  • If the homeowner’s equity is high, a larger upfront investment must be made.
  • Lenders may not always be cooperative. 

Real Estate Transaction

Crunch the numbers, as you would with any real estate transaction - Photo from Canva

You may be asking yourself, why would lenders be uncooperative during a loan assumption?

Well, let’s say that the homeowner’s equity is high, meaning that any interesting would-be loan assumer needs to make a larger down payment. Usually, the prospective buyer will take out a second mortgage in this case. 

While there is nothing illegal or technically wrong with a second mortgage, it may increase the likelihood of default. The logic is simple here. More than one loan equals more risk of default. While the logic may not prove to be true 100% of the time, some lenders may align with this thought process.

If the two lenders are unwilling to cooperate, it could stall or derail your real estate transaction. 

But if the homeowner has low equity in the home, it won’t cost a prospective buyer as much. Some buyers may just put up the cash, depending on how small the amount is.

We can talk with you directly about all of this and answer those specific questions an article can’t. Our team is experienced, with over fifteen years of experience in California. Also, we may be able to guarantee your happiness for 18 months in your new home. 

A Realtor Perspective on Seller Loan Assumption

Don’t be led to believe that assumable home loans are a one-size-fits-all arrangement. They may not work for all buyers. 

A major factor will be the equity the existing homeowner has in the property. The other major factor will be the interest rate on offer. These two variables will likely make or break the value of the real estate transaction.

Ideally, the existing homeowner will have a low-interest rate you can take over. If you don’t wish to make a large initial payment, a homeowner with low equity in the property will suit you.

If you can find a seller loan assumption where the benefits surely outweigh the risks, in a tangible financial sense, you should give it a fair evaluation. Of course, an experienced realtor will be one of the best ways to confirm that.

We’re available during business hours, but sending us a quick message will also get a quick reply from one of our team members. 

More Questions? Follow-up With Us!

If you have more questions about what to expect from the markets around the Bay Area, don’t be afraid to reach out to us today. Our experts are experienced in all property types and the entire San Francisco Bay Area, and we can help you to find what you need to know today.

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