Mortgage Assumption, Is It Right For You? Pros and Cons For Home Owners
If you need to sell your Indianapolis house fast and are running out of options because your mortgage is too high or you don’t have enough equity to sell it without coming out of pocket, then letting a real estate investor assume your mortgage may be the best option for you.
Simply stated, a mortgage that is assumable enables real estate investors to step into your existing loan. If your loan is assumable, this may give you just the advantage you need to get out from underneath a crushing mortgage and move on with your life.
For the buyer, or real estate investor in this example, this can be particularly appealing if interest rates have risen higher than the existing rate on your note. Additionally, assuming a mortgage can save both the buyer and seller thousands of dollars in interest payments, closing costs and hassle.
Let’s get into some details about mortgage assumption and the pros and cons so that you can be fully informed as you consider your options.
If you mortgage is assembler, you as the seller are allowing the buyer to step into your shoes and assume your mortgage responsibilities. When the mortgage is transferred the interest rate, remaining balance and terms remain the same. Is if there are 15 years left on your mortgage then the buyer will be responsible for the remaining 15 years at the current interest rate.
Not all home mortgages are assumable and it’s a good idea to check with your lender first before reaching out to an investor to make sure your mortgage is assumable. This could save you and the investor a lot of time and headache. If your mortgage is insured or guaranteed federally than you mortgage can be assumable.
Types of assumable mortgages include FHA, VA and USDA loans. These loans are guaranteed by the the government. These federally backed loans are insured by the federal housing administration, Department of Veterans Affairs and the Department of Agriculture. In general, conventional loans are not assumable.
Let’s discuss the advantages of assumable loans for a moment. Assumable home loans are generally pretty attractive. If your current loan is at a low interest rate, let’s say it’s fixed at 4.5% and we fast forward seven years. When buyers are out looking for houses and rates have jumped to 7%, your house begins to look pretty attractive. Interest adds up and can make or break a sale. When interest rates are higher, buyers get less house for their money.
If you need to sell your house fast in Indianapolis and have little equity, your options can be limited. But, if you are willing to let an investor assume your loan you can get rid of that property pretty quickly. This is a win-win scenario. The investor gets a property that he or she can rent out without having to outlay any capital to acquire it and you get to be free and clear of the responsibilities. Additionally, with mortgage assumption, much of the costs associated with traditional real estate sales can be avoided altogether. VA, FHA and USDA impose fee limits on closing costs.
There are some disadvantages when it comes to mortgage assumption. As the seller you are giving up any current or future market appreciation. This may have little to no influence on your decision given your current situation.
Some government backed notes, more specifically VA loans, it may inhibit you on future real estate purchases. FHA and USDA loans tend to have fewer restrictions but VA loans provide entitlements to veterans. With VA loans, the government is backing up the buyer or guaranteeing that if for some reason the buyer defaults on the loan it will repay part of the remaining balance. Banks like this reassurance. If you have a VA loan, depending on your total loan amount, some or all of your entitlement may remain tied up with your old house or the assumed mortgage. This may prevent you from qualifying for future VA loans if you plan on buying a house in the near future.
If you are considering mortgage assumption, it is a good idea to inform your lender. It’s too risky to consider mortgage assumption without lender approval. If a lender finds out it can force the remaining balance to be paid in full. The mortgage lender will want to know that the individual or entity assuming the mortgage has the resources, income and credit to satisfy the loan. Without proper execution, the seller can remain responsible for the debt even though the deed has been transferred. Also important with a mortgage assumption, you as the seller should make sure that you get a release of liability from your lender. This will ensure that you are no longer legally liable for the mortgage.
If you are a home owner and considering mortgage assumption, make sure you take the time to get to know the individual or company you are considering working with. Check their references, make sure they are an accredited company with the Better Business Bureau and that they have positive reviews from past customers.