Many home buyers are unaware of ways to save money on home loans such as the assumable mortgage loan. This article explains what an assumable mortgage is and how it is used with VA loans to save veterans thousands in the Colorado real estate market. Active military service members and veterans looking for Fort Carson housing should take advantage of this often overlooked interest rate workaround. If you’ve ever wondered “Are VA loans assumable?”, this article will give you a detailed explanation of an assumable mortgage.
Assumable Mortgages
Not every loan can be an assumable mortgage loan. Only FHA and VA loans are assumable. It’s not a sure thing either because most assumable loans must be approved by the lender unless the mortgage was closed on before March 1, 1988. If the mortgage was closed on before 1988, then it’s automatically assumable without lender approval.
For buyers, it means possibly a much lower interest rate than the current market rate. For sellers, it gives you an edge in the market and a powerful selling point. You’re able to reach more potential buyers especially those who only qualify for higher interest rate loans due to their credit history.
First of all, what is an assumable mortgage? It’s when a buyer takes over the original mortgage loan from the seller and it’s treated like the original loan with the original and often lower interest rate. In other words, there is no change in terms. The buyer agrees that they will make all future payments just as if they were the original borrowers.
At one time, all VA loans were assumable because of the delay involved in permanent station changes. You may move before you are approved for the mortgage loan.
What are the advantages?
You may be asking what are the advantages of a buyer taking over a seller’s home loan. The assumable mortgage can be beneficial for both parties. The seller’s mortgage interest rate is much lower than the current market interest rate, so the buyer will be taking over or “assuming” a lower rate. This is advantageous for buyers who may have lower credit scores.
The advantage for sellers is that the assumable mortgage can be a great selling point that can give their listing an edge on the market. By offering an assumable mortgage, the seller will attract more potential buyers than other homes on the market.
The current interest rates as of Feb 2019 are still great (around 4.25% for a 30-year fixed rate). However, in the near future, that may change! Imagine what you can do with the extra savings each month when rates creep back up to 6 or 7 percent!
Another advantage when you assume a mortgage is that the closing process is less complex and less expensive.
Disadvantages
When a buyer takes over a seller’s mortgage, the buyer may need to take out a second mortgage or bring a larger amount of cash to the table. This happens if the home value is greater than the remaining mortgage amount on the home.
For example, if a home sells for $250,000 with a remaining balance of $100,000, then the buyer needs to fork out $150,000 to make up the difference. The buyer can pay the rest in cash or take out a second loan for the difference.
If the buyer does take out a second mortgage, he could run into problems if the two mortgage lenders don’t cooperate. If he defaults on either of his loans, he may end up being a legal problem for the second lender. Remember, taking out a second loan reduces the benefit of an assumable mortgage loan.
Release from Liability
Sellers could find trouble when the paperwork is processed incorrectly and does not clear the seller from the responsibility for the loan. This ties the seller to the mortgage if the buyer defaults on the assumed loan. To avoid this from happening, the seller should obtain a release from the mortgage holder that clears the seller of any liability. This is a release from liability.
Buyers and sellers who participate in unauthorized assumable mortgages (without the lender’s involvement) run into trouble like this. It’s just like the seller has invited the buyer to move in and make the mortgage payments. Some have an arrangement where the buyer pays the seller a monthly payment while the seller remains the owner and pays the mortgage payment to the lender. These cases are not technically assumable mortgages. It’s best to involve a lender and have an official assumable mortgage.
VA Assumable Loans
Assumable loans are insured by Veterans Administration (VA) loans or the Federal Housing Administration. These VA assumable loans are guaranteed by the U.S. Department of Veterans Affairs, but they still need lender approval or VA approval for the loan assumption.
As mentioned earlier, if the VA loan closed before March 1, 1988, it’s automatically assumable which means it’s freely assumable and no funding fee is required. However, the seller of this assumable loan may remain responsible for the mortgage should the buyer default. To protect themselves, the seller should request a release from liability from the VA.
Note, that this does not restore entitlement. The veteran will have to request approval from the VA to restore their entitlement for use on another VA loan.
It’s unlikely that you’ll find an assumable mortgage from this era (before March 1, 1988) because those loans most likely have been paid off by now. Plus, mortgages from the 1980s had higher (double-digit) interest rates than today’s market rate.
Loans closed on after March 1, 1988, do not have automatic authority, so the assumption request must be sent to the appropriate VA Regional Loan Center. This can sometimes take several weeks to process.
Remember, if you’re a seller, it’s important that you understand how your VA assumable loan will affect your VA entitlement. Check with your local VA office to learn more about the VA assumable loan, or contact an experienced Colorado Springs realtor who is familiar with these loans and the processes associated with them.
