Assumable mortgages mean that the current mortgage can be assumed and undertaken by another person who buys the home from the current owner under the same terms and conditions or a variation in the terms and conditions if stipulated in the mortgage contract.
In eligible mortgage the home buyer assumes all responsibility for the sellers existing mortgage and all obligations to make future payments as if the loan had been taken by the home buyer himself.
Value of an Assumable Mortgage To Buyers and Seller
The main advantage that a buyer has when taking on an assumable mortgage is that he could find lower interest rate on a mortgage than the ones that could be existing in the current market scenario. If a home seller has a 5.5 mortgage for example and the best mortgage rate that can be found in the current market is 7.5% then both the buyer and the seller can benefit from having an assumable mortgage. Taking on and an assumable mortgage also helps avoid settlement and closing costs on a new mortgage. During the period that the market rates are low there is little interest in assumptions. But when the market mortgage rate interest is high, assumable mortgages can not only help the buyer secure a lower rate of interest and save money but also help the seller in finding more buyers for the home.
The value of taking on an assumption depends upon the difference in the current interest rate and the interest rate on the mortgage as well as the durations that is left on the current assumable mortgage along with the balance remaining. Other factors such as how long the buyer expects to have the mortgage and the investment rate the buyer could on on savings from the low rate also make a difference the larger the balance on the mortgage, the larger the difference in the current mortgage rate and that of the assumable mortgage, the longer the buyer expects to be in the home the more he can benefit by assuming an existing mortgage. For example if a 5.5% loan has a 100,000 balance with 200 months remaining while the 7% loan on the same mortgage should be for 30 years, assuming that the buyer expects to be in the house for five years and can run 4% on investments the value of the assumable mortgage is about $7000. This value does not even include the settlement costs and losing costs that would need to be paid for a new mortgage.
On the other hand the saving could be substantially less if the buyer has to supplement the existing loan balance with new the new second mortgage at a higher rate which could be the case if the value of the house has appreciated since the assumable mortgage was taken. The buyers who stand to benefit the most from taking on an assumable mortgage are the ones who have the cash to pay the difference between the sale price and the balance of the old loan.
However, a buyer should not typically expect to take on the full advantage of assumption. The seller usually hopes to benefit as well by sharing the savings that the buyer will experience from the resumption. The sellers share of benefit could also be in the form of a higher price for the house.
Assumable Mortgages Come At a Cost to the Lenders
assumable mortgages come at a cost to the lender. While both the seller and the buyer can benefit from the zoomable mortgage, the lender faces a second disadvantage. While he could have had the old mortgage loan with interest rate of 5.5% completely paid off when the house was sold and the new modesty in other higher rate of interest the old mortgage loan at the 5.5% has to continue on the books. In the earlier years of 1970s and 1980s lenders couldn’t do anything about this and the courts ruled that the lenders could not prevent assumable mortgages.
However, after that experience the lenders began to insert the one sale clauses in their contract notes. These clauses stipulated that if the property is sold the loan must be repaid. Even with due on sale clause the lender may allow resumption keeping loan on books, awarding the cost of making the new loan but with the interest rate being bumped to the current market rate. FHA mortgages and VA mortgages are an exception to this clause. They are still completely assumable which is one more reason why they seem attractive to new mortgage borrowers.
Illegal Assumption of Mortgages
This is also known as a wraparound mortgage. Raising the interest rate on an assumable mortgage the most most of the benefit to both the buyer and the seller. In some cases the seller attempts to retain the benefit buying agreeing to a sale using the wraparound mortgage without the knowledge of the lender. In this case the seller takes on a mortgage from the buyer which is larger than the amount the balance of the old loan and continues to pay the old mortgage out of the proceeds of new one.
This is an extremely risky process. It is risky and more than one ways. First of all if the lender happens to find out that such a proceeding has taken place, he may hold the seller in violation of the loan contract. If this happens the lender can demand the complete and full payment of the mortgage immediately. This can put the seller into a lot of problems. Also if the buyer refuses to make good on the arrangement with the seller and the future there is very little that the seller will be able to do. He has already given up the ownership of the house but will retain the liability of the original mortgage.
Legal Assumptions on the Garn-St. Germain
Whether the mortgage includes the due on sale clause or not certain assumptions are explicitly unknowable on certain types of transactions under the Garn-St. Germain act of 1982. Some such examples are when the title is transferred after the death or divorce or the transfer is to an inter vivos living trust where the borrower is the beneficiary and remains occupant.
Under these circumstances the due on sale clause cannot be implemented. Borrowers with low rate mortgages were involved in a transfer of ownership that is something other than the standard arms length purchase and sale should consult an attorney on whether the transaction falls under the Garn-St. Germain exemption.
Offering a Assumability For Price As an Option
Certain lenders are willing to offer the adjustability feature on a mortgage loan for a certain price. When the borrower is duly concerned with the interest rate which could go higher they may be willing to pay extra for a suitable mortgage which will give them an edge when they want to sell their house in the future. For example a borrower willing to take a 6.5% 30 year FRM might be willing to pay 6.85% for the right to make his mortgage assumable. If the interest rate on the mortgage was to become extremely high in the future being able to offer a 6.85% loan to prospective buyers would have a great value and fetch a good price for the house.
An assumable mortgage has some features and differences to a portable mortgage. If your mortgage is the assumable when you sell your home it can be transferred to the buyer. If the mortgage is portable it can be shifted to a new property that you want to buy.
Portability will not be of much use to you if you decide to rent, go to a nursing home or die whereas an assumable mortgage retains its value in these situations. On the other hand some portion of the value of an assumable mortgage has to be shared with the buyer as well. A mortgage that is both portable and assumable will have the greatest value to homeowner.
Lenders who offer to make a mortgage assumable would require that the new borrower must meet the lenders qualification requirements. Borrowers purchasing the option will need to be confident that the lender won’t tighten its requirements when the market-rate increases.
The best kind of assurance will be if the lender commits to accept the approval of the new buyer under one of the automated underwriting systems developed by Fannie Mae or Freddie Mac.
FHA and VA Loans Are Assumable
Loans insured by the FHA or guaranteed by the VA have always been a assumable. This has always given them a certain advantage over other kinds of loans. This also gives the borrower an advantage when he wants to sell his house in the future if the interest rate are expected to increase.
Old FHA closed before December 14, 1989 and VA loans closed before 1 March 1988 are assumable by anyone. Byers for these mortgages don’t have to meet any requirements but the seller remains responsible for the mortgage if the buyer doesn’t pay. These Loans are now very difficult to find since they are from a long time ago. However, any seller who is allowing an assumption on the mortgage without signing a release of liability is looking for trouble. Even if the new buyer continues to pay the mortgage the seller’s ability to obtain a new mortgage would be prejudiced by the continued liability on the old one.
The liability on the assumed mortgage can be removed if the seller requests the agency to underwrite the new buyer. If the agency approves the buyer then the seller will be released from liability on the FHA or VA assumable mortgage.
Assumption of FHA and VA loans that have been closed after the above-mentioned dates required approval of the buyer by the lender. The approval process is pretty much the same as it would be for a new borrower.
Upon the approval of the new buyer the seller of the house is really of liability on the mortgage. The FHA allows the lenders to charge a $500 assumption. And the fee for the report as well. The VA allows the $255 processing fee and a $45 closing fee. The VA itself receives the funding fee of half of 1% of the loan balance.