Assumable Loan Process | Questions and Considerations

Important Questions and Considerations

When exploring the option of an assumable loan, it's crucial to clarify that the inquiries and qualifications pertain directly to the lender currently holding the note. Buyers interested in assuming such a loan must qualify under the terms and scrutiny of this specific lender. This means that all important questions and considerations we discuss are directed towards and received from the lender in possession of the assumable loan. This ensures that the buyer fully understands the criteria and process as stipulated by the lender, aligning expectations and facilitating a smoother transaction process.

Eligibility Requirements:

• Ask the lender about the specific criteria for assuming the loan. This typically includes credit score requirements, debt-to-income ratios, and other financial qualifications.

• Determine if there are any residency requirements (such as the property needing to be the primary residence of the buyer). It’s rare for investors to assume loans that originated as a primary residence.

Loan Terms:

• Confirm that the terms of the original loan, including the interest rate, loan balance, repayment period, and monthly payment, will remain the same.

• Inquire whether there are any changes in terms that might occur due to the loan assumption. Will the interest rate increase if the loan is assumed? Use TXR 1919 Loan Assumption Addendum when submitting an offer that includes a loan assumption, particularly focusing on Paragraph D2.

Assumption Fee:

• Ask about any fees associated with assuming the loan. Lenders often charge an assumption fee, which can vary. Refer to Paragraph D1 of the TXR 1919 Loan Assumption Addendum for details.

Release of Liability:

• Find out if the original borrower will be released from liability on the mortgage once it is assumed. It’s crucial to ensure that the seller is cleared from any future liability related to the loan. This primarily applies to VA Assumable Loans.

Loan Due-on-Sale Clause:

• Confirm whether the mortgage contains a due-on-sale clause that might prevent the loan from being assumable. Such clauses allow lenders to demand full repayment of the loan if the property is sold. This is very common for conforming loans as opposed to FHA and VA loans, which typically do not have a "due on sale" clause.

Application Process:

• Inquire about the steps involved in the application process for assuming the loan. This will help you understand the timeline and any documentation that your client needs to prepare. Most lenders will state that it takes 45 to 90+ days to process a loan assumption.

Interest Rate Comparison:

• Compare the interest rate on the assumable loan with current market rates. If the assumable loan’s rate is higher, it might be less attractive unless other financial benefits are present.

Future of Loan Terms:

• Check if there are any adjustable rates or balloon payments due in the future under the terms of the assumable loan.

Impact on Seller and Buyer:

• Discuss how the assumption will affect both the seller and the buyer financially and legally.

Legal and Title Considerations:

• Ensure that a title search is conducted and consider if title insurance is necessary. This will reveal any liens or issues with the property’s title.

Escrow Accounts:

• Ask about the status of any escrow accounts associated with the mortgage, especially how funds for taxes and insurance are being handled. Some lenders will require additional language in the contract that will transfer the existing escrow monies to the buyer assuming the loan.

Approval Process:

• Determine the lender’s approval process timeline and what happens if the assumption request is denied.

Common Scenario with Assumable Loans:

A common scenario we are encountering with assumable loans is when the sales price of the property significantly exceeds the amount of the assumable loan. For example, consider a property listed for sale at $450,000 with an assumable loan balance of $375,000. In such cases, the buyer is expected to "make up the difference," which in this instance would be $75,000, typically in the form of cash. This can pose a substantial challenge for many borrowers, as not all potential buyers have the necessary funds readily available to cover the gap between the loan balance and the purchase price. It's important for both buyers and sellers to verify the exact amount that can be assumed on the loan and assess if the buyer has the financial capability to "make up the difference." This ensures that financial commitments are clear and manageable for all parties involved in the transaction.

Specifically for VA Assumable Loans:

VA assumable loans come with particular considerations regarding the veteran's eligibility. These loans allow the transfer of benefits and obligations in unique ways, outlined as follows:

1. Veteran Keeps Their Eligibility:

• Requirement for New Borrower: The person assuming the loan must be a qualified veteran who has their own entitlement available. This ensures that the new borrower can substitute their entitlement for the seller’s, allowing the original veteran to regain their full entitlement.

• Process: The assuming veteran needs to apply for a substitution of entitlement. Both the assuming borrower’s eligibility and creditworthiness will be assessed by the lender.

2. Veteran Does Not Keep Their Eligibility:

• Requirement for New Borrower: The person assuming the loan does not need to be a veteran. Civilians can also assume the VA loan without needing to substitute any VA loan entitlement.

• Seller’s Entitlement: The original veteran’s entitlement remains tied to the loan until it is fully paid off or another veteran substitutes their entitlement. This affects the original seller’s ability to take out another VA loan unless they have additional entitlement or until the assumed loan is paid off.

• Process: The assuming borrower, whether a veteran or a civilian, will still need to be approved by the lender based on credit and income qualifications.

General Considerations for Both Scenarios:

• Approval: In both cases, the lender’s approval is required, and the assuming borrower must meet specific credit and income requirements.

• Release of Liability: The veteran should ensure they are released from liability for the mortgage if the lender allows. This is important to prevent future financial obligations related to the assumed loan.

• Documentation: All parties should ensure proper documentation is filed, such as the agreement for substitution of entitlement if applicable, and all parties should understand the terms of the transfer.

Advantages and Disadvantages:

• Advantage of Keeping Eligibility: The original veteran retains the ability to use their VA loan entitlement for another purchase.

• Disadvantage of Keeping Eligibility: The pool of potential buyers might be limited as only other eligible veterans can assume the loan.

• Advantage of Not Keeping Eligibility: Broadens the potential buyer market as non-veterans can assume the loan.

• Disadvantage of Not Keeping Eligibility: The original veteran’s entitlement is tied up until the loan is paid off, limiting their ability to use another VA loan.

TXR 1920 Release of Liability on Assumed Loan and/or Restoration of Seller’s VA Entitlement can be used with a VA Assumable Loan but both the seller and the buyer should consult with the lienholder prior to using this form as the lienholder will often have their own form.

Keep in Mind: 

Assumable loans, particularly with VA entitlements, represent a relatively new process that lenders are continuing to navigate. The specific procedures and requirements can vary significantly from one lender to another, reflecting the evolving nature of these transactions. It's essential for all parties involved to remain flexible and maintain open lines of communication throughout the process. As lenders are still learning the intricacies of these transactions, understanding that each case might be handled differently is crucial. Keeping everyone informed and engaged helps ensure that the process goes as smoothly as possible, accommodating any unique challenges that may arise.