Getting a loan through another makes sense to some home buyers
Mortgage assumptions were a popular financing option in the 1970s and 80s, but later dropped out of service. Real estate appreciation has been strong in recent times. Unfortunately, the market entered 1991 and crashed in 2008. Before that time, lenders’ demands were lenient and many buyers took out 80/20 combined loans, which contributed to the 2008 housing market collapse.
However, moving forward, mortgage loan assumptions find a place in the real estate market. They are not for every home buyer, and they do not fit into every seller’s goals. But in some cases, the assumption of a loan might be the best choice for all stakeholders, ensuring, of course, that the existing lender will allow the loan to be taken over.
That in itself is a blow.
Why some buyers prefer new credit over mortgage loans
- Too much capital
Part of the reason the credit assumptions were not used in the late 1980s and early 1990s was because sellers had too much capital during the years of business and customers did not have enough money to bridge the gap between credit and sales price. Many sellers were not ready to finance the owners.
- Low interest rates
Another reason that credit assumptions have fallen by the wayside for decades is because buyers can usually get a lower interest by taking a new loan than by taking on an existing loan. It made little financial sense to take a 7 percent loan when the bank offered 5 percent.
- Alienation clauses
The main reason that very few buyers claimed loan assumptions from 1990 to 2009 was because almost every mortgage contained an alienation clause. The mortgage foreclosure clause gave banks the right to accelerate, meaning to seek immediate payment in full, in the event of a transfer of ownership.
Before considering the assumptions for a mortgage loan
The climate must be right to take on a mortgage loan. Other loans usually call for payment in full in case the house is sold to another buyer. Sometimes buyers take the title and take no credit. Buying a home can be risky. Before considering the loan assumption:
- Compare interest rates
When interest rates are higher than the interest rate of an existing loan, it might make financial sense to take on an existing loan at a lower interest rate. The difference in the monthly payment at $ 200,000 at 5% versus 7% is $ 257 per month. Over 5 years, that’s a savings of $ 15,420.
- Compare credit fees
Due to federal requirements, lenders are required to provide debtors with a closing cost estimate, called a loan estimate. The loan estimate explains all the costs associated with getting a mortgage. Generally, buyers pay much more in loan fees to get a new loan than it costs to take on an existing loan. The difference could be several thousand dollars or more. Ask the bank to provide you with a statement containing your loan overdraft fees.
- Obtain a user statement and a copy of the mortgage
Before choosing a seller word and spending money on home inspections, get a copy of a customer statement to determine the outstanding balance of the loan and whether the loan is actually assumed. In softer real estate markets, the difference between an outstanding balance and a sale price may be low enough that a 10 or 20 percent drop will allow you to pay off your loan money.
It is wise to consult a real estate attorney to find out more about your rights and responsibilities before embarking on any creative financing options. Nothing is captured anymore.