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Loan Assumptions

Writer's picture: Josh SurverJosh Surver

Did you know... that all government backed loans are assumable?


This post will explain what that means and how to execute a loan assumption.


You know all those rates from around 2020? Well, with loan assumptions, you could walk into one of those rates, the remaining loan balance, term (years left on the loan), and payment (PITI). I've seen rates as low as 1.75%... I've personally helped a client execute one where the borrower is saving $20,000+ per year in interest payments that he would have paid with a new loan at today's rates. These are miracle deals!

As a dual licensed real estate agent/mortgage broker, I often have a unique insight into the financial situations of my clients, and I can't help but pitch the loan assumption for those who are able to overcome their downsides. To date, I've completed just under a dozen of these transactions for my clients and myself. Seriously, why buy properties any other way?


To be clear, there are negatives to this purchase strategy. Firstly, you need to come up with the "gap" - the difference between the agreed upon purchase price and the remaining loan balance - as a down payment. Another way to say this is that you need to reimburse the seller for their equity. The gap on a loan assumption deal can be anywhere from zero to hundreds of thousands of dollars, which can be an immense obstacle to overcome.


Thankfully, there are lenders out there who are willing to finance part of the gap. Every lender has different overlays, including occupancy status of the home, DTI requirements, FICO minimums, and min/max loan amounts, but if there are lenders out there willing to finance the gap up to a cumulative loan-to-value (CLTV) of 90-95%, meaning the buyer only has to come out of pocket for 5-10% of the purchase price. These piggyback loans, as they are called, need to be approved by the first-position lien-holder, i.e. the seller's current servicing lender.


If you can overcome the gap, you have another obstacle to face - the servicing lender. While the government says that all of the loans they back are assumable, it's incumbent on the seller's current servicing lender to qualify the buyer and approve the transfer of the loan. That process can take a very long time compared to a new loan. I've speculated as to why that might be, but likely there are a number of factors that affect this timeline - lenders don't want to do them, their processes are rusty, and there's been a surge of demand for them in recent years are mortgage rates have spiked. The average loan assumption takes between 2-3 months to complete, but I've seen as short as 1 month and as long as 5 months. Completing one is typically an incredible hassle and can be very frustrating. Some lenders are better than others at getting these done.


Oftentimes, the process to complete a loan assumption includes first getting approved by a totally separate lender so you can get your foot in the door with an offer. Servicing lenders, unless they are tied in with origination departments, are not in the business of generating preapproval letters, so they typically won't engage with a buyer until they have a third-party authorization form signed by the seller authorizing them to speak about the seller's loan with the buyer. Sellers are reluctant to give engage the process until they are under contract with a buyer, meaning the buyer has to figure out the preapproval on their own. One of the services I provide to my real estate clients is the opportunity to receive a free preapproval as I can do the work in my role as a lender, knowingly taking a cost (credit reports cost ~$100) in one silo of my business for the chance at a commission in another. Providing this service gives me a competitive advantage over other realtors who are unable to provide the same level of aid to their clients.


Once you're under contract, the steps typically proceed as follows: 1) third party authorization letter signed and sent to the servicer from the seller, 2) submit a loan assumption packet (info from both buyer and seller) to the servicer, 3) get assigned a loan officer, 4) submit a loan application, 5) send additional docs as required by the underwriter, 6) receive clear-to-close, 7) close. For the most part, the process is the same as a new loan from step 4 and on, but the response times of the lender are typically much slower.


On the VA loan, there are two ways to execute the assumption and they have ramifications for both parties in the transaction. With the VA loan, there's something called VA eligibility that's involved. Every veteran with access to the VA loan has a certain amount of VA lending available to them. Right now, eligibility is capped at $806,500 in the average county when spread across multiple properties. When a veteran sells their home with a VA loan assumption, they have two options: 1) request a veteran buyer comes with their own entitlement to substitute, or 2) offer to leave the entitlement they originally used on that purchase with the home to allow a non-veteran or veteran who doesn't want to use their own entitlement in the purchase.


If the seller leaves their entitlement on the home, they will be limited in their future VA lending until that buyer sells or refinances the home with their entitlement attached to it. The seller will always be able to get additional VA lending above and beyond what entitlement they have left - they just need to put 25% of the different down above their remaining entitlement. VA entitlement limits go up almost every year and varies by county.


If you're looking for a home today, consider the cost. Are you interested in a loan assumption? I'd be happy to help you find one and take you through the process.


30-Year Fixed Rate Mortgage Average in the United States (https://fred.stlouisfed.org/series/MORTGAGE30US)
30-Year Fixed Rate Mortgage Average in the United States (https://fred.stlouisfed.org/series/MORTGAGE30US)

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