Investing in real estate is lucrative these days. There are several ways you can reap profit immediately including opening your properties for rent and betting your wealth on real estate equity trust funds. One less known way is through an assumable mortgage.
What is an assumable mortgage?
A mortgage is said to be assumable if the responsibility stipulated in its terms is transferred to a buyer. In this case, the buyer avoids taking out a separate mortgage to eventually own the house. It’s common practice to finance a residential property with a mortgage. If an individual decides to sell it later despite being bound by his mortgage obligations, he can transfer the mortgage to an interested buyer.
Advantages of an assumable mortgage
For the Seller
Often discussed are the wins of the one who assumes an existing mortgage, but owners wouldn’t sell quickly without knowing what’s in the sale for them. Property owners who are particularly interested in buying and selling or investors, in general, are well aware that interest rates are ever-increasing. Therefore, older mortgage loans become more attractive to buyers who would not want to assume the burden of current mortgage rates.
It is also worth noting that not all mortgages could be assumed. So, if it could, sellers could gain an upper hand in negotiating the sale price, even one that’s close to the prevailing asking price. This could especially be beneficial to the seller if he needs a big amount of upfront cash.
For the Buyer
Aside from being able to pounce on a good investment deal, the buying party in an assumable mortgage arrangement guarantees savings if the loan’s interest rate is lower than the prevailing market rates.
Overall, it could be the cheaper option than taking out an all-new loan from a lender. The buyer is practically skipping the initial interest payments. Likewise, he could avoid having to pay a part of the settlement costs.
Disadvantages of an assumable mortgage
For the Seller
Assumable loans are particularly problematic for the seller if the Department of Veterans Affairs grants them. Also called a VA loan, this type of assumable loan entitles the owner to repay the balance from the government in case of default. Selling might run the risk of losing the entitlement. A viable option to restore this entitlement is selling the loan to a certified military member or veteran who is also qualified for a VA loan.
For the Buyer
An assumable mortgage will typically require the buyer to make a big down payment. Sometimes, it will require the buyer to apply for a second loan to settle a big payment. Buyers will also have to note that a property’s value appreciates over time.
If the property is appraised at a greater value than the outstanding mortgage, the buyer must compensate for the difference. For instance, if a seller has paid for $100,000 of the mortgage but the house’s value has staggered to $200,000, the buyer has to amass a sum of $100,000 to buy it. For this reason, it is often wise to assume a mortgage that is paid for only a few years or when the house’s value hasn’t bloated up as much yet.
Types of Assumable Mortgage and Modes of Approval
In general, mortgages that are executed within the last 20 years are assumable. But, who may qualify to assume may differ according to the following types of loans:
VA Loans
These loans are granted for military members and their spouses by the Department of Veteran Affairs. Although military members often could assume this type of loan, anyone can assume a VA loan even if heor she is not a military member provided they are approved by the VA loan office and the lender. But, VA loans dating back to February 29, 1988, and earlier could be freely assumed without the VA office or lender approval.
FHA Loans
FHA loans, which the Federal Housing Administration grants, are another type of assumable mortgage. Before officially assuming the mortgage, a buyer must meet the conditions set forth by the FHA such as using the seller’s property as his main residence. Likewise, the owner’s lender will validate the buyer’s qualifications including his creditworthiness.
USDA Loans
Granted by the Department of Agriculture, USDA loans are marketed to those interested in owning a property in rural areas. A buyer could qualify to assume such a loan by proving creditworthiness and financial capacity. After being approved, the USDA will hand the buyer the property title.
Selling and assuming mortgages are indeed viable options for investors. But, it takes a level of responsibility to meet the lender’s requirements and the granting authority. Also, it involves weighing the benefits of the sale or the purchase given your investment horizon or if you’re expending a significant amount at a discount or not.
