Your Mortgage : Search Is On for Assumables : The market: One of the biggest benefits to assuming a loan is often overlooked--less of the monthly payment is “wasted” on finance charges.
A growing number of home buyers are looking for assumable loans, now that home sales are down and mortgages rates have inched up.
Assumable loans are loans that you can take over--or “assume”--by making the seller’s monthly mortgage payments.
For example, say you want to purchase a $150,000 home. The outstanding balance of the loan on the property is $125,000.
You may be able to assume the loan by making a $25,000 down payment and taking over the seller’s monthly payments on the $125,000 balance.
Assumable loans can be attractive for a variety of reasons. Many assumable loans were made years ago and carry interest rates that are far below the rates you could get if you took out a brand-new loan today.
In addition, it’s usually cheaper to assume a loan than it is to set up a new mortgage because you don’t have to pay as much in up-front fees for points and other items.
“You usually don’t have to fill out as much paper work when you want to assume a loan, and the loan-approval process is faster,” added Dennis Casey, a senior vice president with San Diego-based Home Federal Bank.
Ironically, one of the biggest benefits of assuming a loan is often overlooked: More of your monthly payment will go toward the principal amount of the loan instead of being “wasted” on finance charges.
For example, if you took out a new 30-year loan for $100,000 at 10%, your monthly payment would be about $877. In the first month, about $44 would go toward principal and the remaining $833 would go toward interest.
If you instead assumed a $100,000 loan at 10% that was five years old, an extra $30 each month would go toward principal.
“At the end of the year, you’ve saved yourself more than $300. That’s not a fortune, but it’s nothing to sneeze at,” said Peter G. Miller, author of “The Common Sense Mortgage” (Harper & Row: $7.95).
The process for assuming a loan varies from one lender to the next. Typically, your first step is to contact the seller’s lender and confirm that the loan is assumable.
If the answer is yes, you’ll need to ask the lender what requirements must be met to make the assumption. You’ll also want to find out what type of fees you’ll be expected to pay: Some lenders charge stiff “assumption fees,” while others charge very little.
Also, ask if the lender reserves the right to make changes to the loan’s interest rate and other terms.
“A lot of lenders will let you assume their loans, but only if you agree to renegotiate the interest rate or pay a lot of fees,” said Forrest Pafenberg, a lending expert with the National Assn. of Realtors.
“There’s really not much use in assuming a loan if the lender is going to readjust your interest rate to market levels.”
You’ll also have to fill out some paper work, but not as much as you would if you were applying for a new mortgage.
“One of the most important items we’re going to look at is your credit report,” said banker Casey. “We’re going to make sure that you’ll be able to make the payments, just like the seller has been doing for years.”
Off the record, some lenders admit that they don’t scrutinize buyers who want to assume a loan quite as closely as they do buyers who are seeking a new mortgage.
That’s because the equity that the seller has built up provides them with a financial cushion if they must eventually foreclose.
“If we made a $100,000 loan on the house 10 years ago and now the house is worth $250,000, we can afford to overlook a few problems on the buyer’s credit record,” said one Southland lender.
“Even if the buyer assumes the loan and quits making his mortgage payments, there’s really no way that we’re going to lose money if we have to foreclose.”
Still, lenders won’t just rubber-stamp your request for an assumption. Since you can be turned down, protect yourself by including a clause in your offer to buy the home that allows you to back out without penalty if the bank won’t let you assume the loan on its current terms.
If you’re selling your home and the buyer wants to take over your payments, make sure that he actually gets the lender’s approval.
If he instead takes the property “subject to the mortgage,” he’s not personally liable for making the payments. Should he default, it’s your credit record that’s on the line.
In fact, some lenders insist that you remain liable for the loan payments even if the assumption is approved.
If that’s the case, at least get the lender to agree to notify you in writing if the buyer falls behind on his payments. Or, simply wait for another buyer who’ll get a new loan in his own name so you won’t have to worry if he eventually defaults.
Although most fixed-rate loans cannot be assumed, there are two important exceptions: loans backed by the Federal Housing Administration and the Veterans Administration.
Assumable FHA and VA loans are often sources of great bargains. We’ll talk about them next week.
Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles 90053. Questions cannot be answered individually.
