What is an assumable loan and why does it matter when you are ready to buy or sell your home? The short answer is that it can save money and help you buy more home for your money. Here’s how it works.

Assumable loans are government loans such as an FHA, USDA, or VA loan. People typically get these loans because of lower or no downpayment options (especially in the case of VA and USDA). FHA loans are common with people with lower credit scores. If you purchase a home from someone with one of these loan types, you could potentially “assume” or take over their loan. Why would you want to do this? Two main reasons: you can assume a lower interest rate and you save on closing costs.

Home buying and selling is being massively affected by the rise in interest rates after years of unprecedented low rates. Even so, rates are still lower than what many of our parents paid in the 80’s, or even the 8% I had on my first home in the 90’s. An uptick in home prices really compound the affect of these higher rates. For example, if you buy a home for $150,000 then the difference between a 3% or a 6.5% rate is less than $300 a month*. Conversely, now that most starter homes are closer to $300,000 that difference in rates translates to over $600 a month more. When you are already stretching your budget to make the $1600 monthly payment at 3%, many people won’t be able to qualify for the $2,200 monthly payment with a 6.5% rate when buying a $300,000 home. However, if you have the option to “assume” a loan at 3.5% or even 4%, that home price might now be in your reach.

In order to assume a loan you must qualify for the program. If you can qualify for a conventional loan then you almost always can qualify for a USDA or FHA loan. VA loans can only be assumed by Veterans and in some cases spouses of veterans. Every lender that holds the mortgage will have its individual process. My newest listing has an assumable FHA loan with a 3.5% interest rate. Service Mac, the loan servicer, requires a packet of paperwork that the current seller can initiate once there is a buyer. It’s similar to a normal loan qualification process. There is a $900 fee at closing instead of all the normal originating costs of acquiring a new loan. Read more about the entire loan process in detail here.

Here are the 3 biggest advantages of assuming a loan right now:

A much lower interest rate
Minimal closing costs
You don’t have to have an appraisal (at least a $500 savings)

Nevertheless, there are a few disadvantages to assuming a loan. An FHA and a USDA loan typically have monthly government insurance costs, similar to PMI (private mortgage insurance) that you have with a conventional loan. Unfortunately, with an FHA and a USDA loan you will pay this little fee each month even after you have a lot of equity in the home. Chances are though that rates will go down in the next few years and you can refinance to a conventional loan at that point if you chose. The savings in the lower interest rate far outweighs the monthly fee even if you pay it for the life of the loan. You also have to have enough cash to make up the difference between the balance of the loan and the purchase price. For example, we have a new listing in Comer coming up soon. This house will be listed at $325,000 and the balance on the loan is about $276,000. If you pay the list price for the home, you will need $49,000 to pay the seller the difference. That’s about a 15% downpayment. If you are selling a home though, there’s a good chance you have at least that much equity in the home you are selling.

Many people that want to move might feel stuck because it’s hard to leave a 3% interest rate. If you have a government loan at a lower rate, please reach out to me. You have a huge advantage in getting your house sold and should be able to maximize your profit. If you are an agent, ask your clients before you list their home what kind of loan they have. We need to get the word out that this is an option. An assumable loan can help whether you are buying or selling a home! Interested in learning more about the loan process in detail?

*Depending on taxes and insurance, with a 3% downpayment, the minimum allowed with a conventional loan, the monthly payment with a 3% rate is about $950 a month and with a 6.5% rate it’s about $1240 a month. These are the same basic conditions for the example with the $300,000 home.

Buying or Selling a Home with an Assumable Loan