How can an assumable loan help both buyers and sellers? - Ask Gigi Question of the Day

Ask Gigi Question of the Day

An assumable loan lets a homebuyer take over the seller’s existing mortgage balance, interest rate, and remaining repayment term, subject to the loan’s rules and any required approval. If the seller locked in a low rate, that can make a real difference in the monthly payment.

But if you call me about a listing that says “3% assumable loan,” my first question is going to be “How much of the purchase price does that 3% actually cover?” The rate catches your eye. The balance tells you how much you’ll need to bring to the table.

How does an assumable loan work?

Here are the three questions I’d start with when you talk to the seller’s mortgage servicer.

1. What interest rate would I take over?

2. How much of the existing loan can I assume?

3. What requirements do I need to meet to qualify?

   
   

FHA and VA mortgages can be assumable. Ask the servicer to confirm the rules for the specific loan, what documents the buyer needs to provide, and how long the review is expected to take. HUD’s FHA handbook and VA’s guide to home loan assumptions explain the program rules.

Now let’s put some numbers on it. Say the home is $450,000 and the seller owes $300,000 at 3%. The 3% rate applies to the $300,000 you’d assume. You still have a $150,000 gap to cover, plus closing costs. If you plan to borrow some of that difference, ask whether additional financing is allowed and what it would add to your monthly payment.

Once you have those answers, give the lower rate some weight when you write your offer. If the assumption works well for you financially, think about how your price and terms will look to the seller. You’re asking them to work through additional paperwork and potentially wait longer to close. A competitive offer with a clear plan for the gap and a closing date that accounts for the servicer’s timeline gives the seller something concrete to consider.

How much could an assumable loan save you?

Here’s what the payment looks like when we compare the same $300,000 loan amount at two different rates and terms.

Example	Rate	Repayment term	Monthly principal and interest
Assume the seller’s $300,000 loan	3%	24 years remaining	$1,463
Take out a new $300,000 loan	7%	30 years	$1,996

In this example, the assumed loan costs about $533 less per month in principal and interest and is scheduled to be paid off six years sooner. If you need a second loan to cover part of the $150,000 gap, include that payment when you compare the two options. That’s the number I’d want to see before deciding which way to go.

These figures are for illustration. They exclude taxes, insurance, fees, and financing for the gap. Rates, terms, approval, and savings are not guaranteed. I’m a Realtor, not a licensed mortgage loan officer. A mortgage professional can help you compare the options for your situation.

What should sellers know before advertising an assumable loan?

If you’re selling, a low-rate mortgage can give buyers another reason to look at your home. Before you advertise the loan as assumable or commit to a closing date, call the number on your mortgage statement and ask for the assumptions department. Here’s what I’d ask.

1. Can a buyer assume my mortgage?

2. What do I need to do to be released from liability at closing, and how do I get that release in writing?

3. What fees or other costs would I be responsible for?

4. What are the steps, and how long does it typically take from application to closing?

Ask for the current balance, interest rate, and remaining term in writing. If it’s a VA loan, also ask what the assumption would mean for your VA entitlement. VA’s seller guide explains release of liability and substitution of entitlement.

“When I help buyers and sellers look at an assumable loan, I focus on three things. How will the buyer cover the gap between the purchase price and the loan balance? Can the buyer qualify to take over the loan? And when can everyone realistically close? On a recent call with a servicer, I was told it could take seven to ten days just to get the assumption packet, then about sixty days to close after the completed packet was submitted.” — Gigi Pendleton, REALTOR®

That servicer also asked for the proposed buyer’s name and contact information before issuing the packet. Ask your servicer what starts the process and what timeline to plan around.

Think about what the asking price does to the buyer’s side of the deal, too. At $450,000, the buyer in our example needs to cover a $150,000 gap. At $470,000, that same loan leaves a $170,000 gap. The buyer still gets the 3% rate on the $300,000 balance, but now they need to come up with another $20,000. That’s worth talking through when you’re pricing the home or weighing an offer.

If you were buying a home with an assumable loan, what would you want to know? Ask in the comments. Your question might be the next Ask Gigi Question of the Day.

Gigi Pendleton, Realtor® | Real Broker, LLC

Ask Gigi – Real Estate for Real Life