Assumable Mortgages In DC

What’s an assumable mortgage, which mortgages are assumable, and how does the process work 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.

If a homeowner obtained a mortgage when rates were substantially below the current market rate, and the loan is assumable, buyers may be offered that lower rate under the terms of the existing mortgage, for the remaining balance of the original loan.

To determine if a mortgage is assumable, sellers must start by reading the loan contract, then contact your mortgage lender to confirm and define the terms, requirements, restrictions, costs and the process for assumption.

An assumable mortgage allows many home buyers to assume the current principal balance, interest rate, repayment period, and any other contractual terms of the seller’s mortgage.

Assumable loans are desirable when interest rates rise, but buyers can only assume the balance of the existing loan. The longer the seller has paid toward the loan , the lower its balance will be, and buyers will have to make up the difference in cash or take out a second mortgage at prevailing market rates to cover the difference.

The list price of a home in DC is likely to be higher than the remaining mortgage balance. The amount of that difference depends on the length of time the home has been owned, the terms of the existing mortgage loan, and the current market value of the property.

Not all buyers can take advantage of a loan assumption opportunity. Investors, for instance, can not assume an FHA or VA mortgage loan as these programs are specific to owner-occupants.

Here are the basic steps for offering of an assumable mortgage: 

Step 1

Seller determines if the loan is assumable, and initiates the formal process required by the existing lender to offer the assumption to buyers;

Step 2

Sellers must obtain formal permission from the current mortgage lender in order to offer loan assumption. Most mortgages include a “due on sale” clause, making the full balance of the loan due when the home is sold. A seller who wishes to offer their home for sale with the provision of an assumable mortgage first must secure permission from the lender so the ‘due on sale’ clause isn’t triggered.

Sellers will also want the lender’s participation in transferring the mortgage (novation) because the buyer’s assumption in itself does not release the seller from responsibility for loan payments after the transaction closes. The lender must release the seller from liability in writing at the time of closing for the seller to be free of responsibility.

When listing the home with a confirmed assumable mortgage, the seller should advertise the fact that the loan is assumable, and in what amount.

Step 3

The buyer must apply to the existing lender to assume the mortgage, just as they would make a loan application for any mortgage loan, except that qualification will be for the terms of the original loan, and show ability to pay cash or obtain a second mortgage (typically at a higher interest rate) to make up any difference between the balance of the existing loan and the purchase price (less down payment).

The buyer must meet the lender’s standards of creditworthiness, income, debt-to-income ratio (DTI), etc. in order to qualify for one or both loans;

Step 4

At closing, the seller signs a warranty deed transferring title to the home to the buyer and the buyer signs a loan agreement and other lending documents assuming the existing loan. The buyer will also bring a second mortgage or cash to cover the difference between the loan assumed and the purchase price, if any. The lender releases the seller from further loan responsibility with the novation transfer.