Obsolete or Market Advantage?

Assumable mortgages faded from memory when rates worked their way down from record highs in the 1980’s. And because FHA and VA mortgages represent a smaller portion of the mortgages in the District thanks to a decade of low inventory and stiff competition, many thought them obsolete. Until rates shot up this year.

Now, we’re rediscovering assumable mortgages and reassessing their relevance in the DC real estate market.

An assumable mortgage is one that can be transferred from the current mortgagee to a qualified buyer, reassigning the terms agreed upon when the loan was first originated.

The simplistic version goes like this:

• The seller check​s​ their loan ​contract and confirm​s with the existing lender​ that the loan is assumable​
• Seller​​ submit​s​ a request to the lender to ​offer the assumable mortgage ​to buyers on their upcoming home sale
• Lender agrees and the home ​is listed
• Qualified buyers wish​ing to buy with the seller’s existing loan rate and terms ​apply to the seller’s lender for an assumption​ mortgage
• Once approved, the sale goes through and the loan obligation is transferred from the sellers to the buyer, releasing the seller f​ro​m any further responsibility.

Read our page Assumable Mortgages And Sellers for all the details.

You want to make sure you have your lenders’ approval before moving forward. A lender-sanctioned process, known as ‘Novation’ (an agreement made between two contracting parties to allow for the substitution of a new party for an existing one) means you’ll be released from responsibility when the transaction closes. If you proceed with a ‘Simple’ assumption, a private transaction between you and your buyer, you can be held liable if the buyer defaults on the loan.

You also want to keep these points in mind:

• If you have a great deal of equity, buyers will have to bring a large sum of cash to the table in order to make up the difference between the remaining balance of your existing mortgage and the purchase price, or take out a second mortgage at market rate
• If your interest rate is not significantly lower than the current market rate, the costs and cash requirements of an assumption may not be attractive to buyers
• If you have a VA loan, the buyer does not have to be in the military to assume it, but the lender and regional VA loan office will need to approve the buyer for the assumption in most cases. Also, some or all of your entitlement could remain tied up in the home even after the sale to a non-military buyer, depending on the loan amount, so if you planned to use it to qualify for a new VA loan for your next home, it may not be available to you. If the VA seller sells to another VA-eligible buyer, the buyer can then substitute their own entitlement for yours.
• You’ll want to work with your agent to carefully price the home, factoring in estimated savings to the buyer based on lower interest rate and closing costs, as well as the home’s current market value, condition and attributes.