Attracting buyers when interest rates are high

What could be more attractive to buyers right now than buying with a (well) below-market interest rate on their mortgage?

Interest rates may be rising, but there are still ways to win in this market. Sellers holding assumable mortgages may have a leg up on the competition. Especially if they only made small down payments and took their loans when rates were at their lowest.

So, what is an assumable mortgage anyway?

Most residential mortgages have a "due on transfer" clause. The loan must be repaid in full if the borrower sells or gives the mortgaged property away. Assumptions allow qualified buyers to step into their seller's shoes and take over responsibility for the seller's existing loan. Think about that: If current market rates are at 7%, but the seller is holding a 3.5% assumable loan...... gold!

Which loans are assumable?

VA loans are. So are many FHA and other government-backed loans accounting. In aggregate, these account for 18% or so of the overall US mortgage market so there should be plenty of opportunity out there to deploy this tactic.

Focusing on VA loans:

• The parties must ask the loan servicer to agree to an assumption.
• There are no guarantees that the lender will agree to allow the transfer.
• The request must be approved like a "normal" loan originator would. The buyer's credit history, debt and income levels, and value of the property must all be sufficient.
• The borrower must agree to assume all mortgage obligations, including owner occupancy.
• The assuming party does not have to be a Veteran as long as they qualify with sufficient credit and income.
• The loan servicer may charge an application fee of $200-300.
• There is a VA funding fee—one-half of one percent of the loan balance. This fee can be waived for veterans with service-connected disabilities, purple heart recipients, and surviving spouses.
  
  

Watching for traps for the unwary:

• The seller may still be liable for the debt after closing should the buyer default. The seller must ask—and should only proceed if—the lender and VA to release the seller from personal liability.
• Sellers may lose their VA loan entitlement benefit, limiting their ability to use a VA loan to purchase another residence. Generally, veterans are entitled to use the benefit for one loan. Unless buyers qualify for a VA loan entitlement benefit of their own, the seller may lose the loan entitlement benefit until it is paid in full. And if the buyer defaults, the seller may never get it back.
• Judging by my informal surveys, very few professionals have experience getting these done at all. These requests are not processed using standard loan origination channels. You have to ask the loan servicer. Your mortgage loan officer of choice does not handle these.
• Assumptions probably take longer to process than new loan originations. It's been so long since market conditions were favorable for this sort of thing and there is very little infrastructure to deal with these requests right now.
• Processors with "automatic authority" to approve VA loans are supposed to act on applications within 30 days of submission.
• Lenders without automatic authority are supposed to submit applications to the VA within 21 days of receipt and the VA must act within 14 days after that. I'd figure 45 or more days total.
• Some loan officers are saying that it can take substantially longer than that (6-9 months). As much as I appreciate these officers, bear in mind that (a) they make money on new loans, not the transfer of existing loans and (b) no one really has a lot of experience handling assumptions.
  
  

One last point to consider: The buyer may need to have a fair amount of cash on hand that can be put into the transaction. Or, that buyer will need to line up some sort of subordinate financing with a second mortgage or HELOC. The seller has presumably paid the original loan balance down; at the same time, the property's value has likely appreciated.

Worth it to jump through these hoops? I should think so. Below-market interest rates should be an unbelievably valuable tool in today's marketplace.

As always, the assistance of a knowledgeable closing attorney and real estate broker is critical to a successful assumption of mortgage. Make sure you are working with well-qualified, experienced professionals (call us).