Loan Assumption and Assumable Loans

Every once in a while, the subject of assumable loans comes up. An assumable loan is one where the owner of a property has the ability to pass the loan along with the property in a sale. In other words, if they sell a property with a $200,000 assumable loan on it, by assuming the loan, the buyer only has to come up with the difference between that $200,000 and the purchase price. The $200,000 loan is a constant of the situation.

About the only loan that generally has an assumption feature is the VA loan. There are other loans out there that are assumable, but it's a matter of company policy of the lender funding the loan.

Just because a loan is assumable does not mean that any person is acceptable to assume such a loan. The lender has the right to approve or disapprove a loan assumption. The way to bet is that any prospective borrower is going to have to qualify under loan guidelines at least as stringent as the original loan. Mind you, if the rate is higher than the current market, the lender is likely to be somewhat forgiving, but if the rate is lower than current market, the lender has an incentive not to approve the assumption. They may approve it anyway, if the rate still beats the active return on the secondary market. But given the latitude to make their own decision, it's not exactly amazing how often everyone will usually follow their economic best interest.

Even after an assumption gets approved, the original borrower is not off the hook. I don't think I've ever heard of an assumption where there was no recourse to the original borrower. The VA loan has full recourse to the original borrower (and their VA guarantee) for a minimum of two years. This means that those original borrowers aren't going to be able to get another VA loan for at least two years, or at least that they're limited by the amount of their overall VA limit tied up in the assumed loan.

Other than VA loans, loans where there is an assumable option are generally a little higher than the non-assumable competition in terms of the tradeoff between loan rate and costs. This is because assumability is a feature with value. They're giving you something that has value the competition does not - they want some value in return. It's generally not a huge difference, but in the absence of someone asking for an assumable loan, I generally presume lower rate/cost tradeoff is more important to my clients, and I can't remember the last time a wholesaler with assumable loans won that battle.

Now there is a concrete value to having an assumable loan. Particularly in markets like today in much of the country, they are one more way to get the property sold, and sold at a better price. After all, you have a feature that few other sellers have. The offer to allow someone to assume your loan can help certain kinds of buyers who may not be able to qualify otherwise, It's a narrow niche, but it does exist, and the ability to have any niche of potential buyers to yourself is valuable in a slow market. This doesn't say you can ask for way more than the property is worth, it says that you have a tool to lure certain types of buyer, and have a tool to move negotiations in the direction you'd like them to go once there is an offer.

Caveat Emptor