WEEKLY PRACTICE TIP
BUYER ASSUMING SELLER’S EXISTING LOAN
Scenario 1: I have a listing and the seller wants to know if the loan is assumable by the buyer. I have never been asked that before. How I find out if the loan is assumable and, if so, how is a loan assumed by a buyer?
Response: First, some background. In a period of low interest rates, buyers were not interested in assuming loans that had a higher, or even marginally lower, interest rate. Now, with increasing interest rates on new loans, an assumable loan can be advantageous for both seller and buyer. In a typical loan assumption, the buyer must submit an application and be approved. Once the sale closes the new owner “assumes” the obligation of the loan and the prior borrower/seller is released from that obligation.
Most government-backed loans, including VA, FHA and USDA loans, are assumable for buyers who meet their credit and other criteria. Most, but not all, conventional/conforming loans are not assumable. Generally, a loan assumption requires a credit check of the new borrower who may charge a fee for the assumption. If a loan contains a due-on-sale clause, a new buyer may not assume the loan. A call to the lender or servicer can determine if the loan can be assumed. (Agents should not call the lenders to make these determinations).
Scenario 2: My buyer wants to know the advantages and disadvantages of assuming the seller’s loan.
Response: Advantages of Assuming Seller’s Loan: There are advantages for both the buyer and the seller when a buyer assumes and takes over the seller’s loan. This is true if the seller’s interest rate is substantially lower than the current market rates, or the rate is lower than that which the buyer might be able to be approved for based on credit history.
This is a benefit for the buyer, but can also be a benefit for a seller. The seller can use the assumable loan as a marketing benefit for the home and it could give the seller an advantage over other comparable homes on the market.
Disadvantages of Assuming Seller’s Loan: A buyer who assumes seller’s loan may have to apply for a second loan, or put up a larger down payment if the sale price of the home is significantly higher than the seller’s existing loan.
For example, if the home is selling for $1,000,000 with a remaining loan of $600,000, then the buyer will need to make up the difference of $400,000 in cash down payment or cash plus a second loan on the property.
But, taking out second loan also reduces the benefit of assuming the low-rate loan. In the scenario above, If the buyer has $200,000 cash down payment and obtains a $200,000 second loan at a current rate of 6%, and then assumes the seller’s loan at 2.5%, the resulting total interest rate cost to the buyer is a blend of the two.
Scenario 3: I have a listing with an existing first loan. Seller has received an offer from a buyer who wants to “assume” that loan but not tell the lender. How would that work?
Response: An assumption of the loan can ONLY exist with the knowledge and approval of the lender on the loan. What this buyer and their agent are proposing is known as a “Subject To” transaction.
The buyer is proposing to purchase the property “subject to” the existing loan. In other words, the buyer states that contractually they will take over the payments of the loan but is asking that the seller not inform the lender of the sale. In a typical “subject to” offer the buyer often has little cash and/or bad credit and will also ask the seller to take a second “owner carry” loan secured by a deed of trust on the property.
Advantages to the Seller: None.
Advantages to the Buyer: None
A “subject to” transaction will not work since loan lenders are now watching for any deed recordings on properties on which they have a loan. As soon as they see a deed transfer of the property that will trigger the “due on sale” clause and, if the buyer is not able to secure a new loan to pay off that first loan before the foreclosure sale is consummated, that lender will commence foreclosure action. If the buyer is unable to timely secure replacement financing, and the foreclose sale goes through, the buyer loses the property and sellers second deed of trust securing seller’s loan is wiped out.
PRACTICE TIPS
Buyer Agents:
- Agents should not call the lender or investigate the terms of the sellers loan; sellers should undertake this investigation.
- Before submitting an offer that includes an assumption of the current loan on the property, check with Seller’s Agent to determine of the loan can be assumed.
- If your buyer wants to propose taking the property “subject to” the existing loan, advise the buyer to consult with their own qualified California real estate attorney regarding the risks of doing so.
Seller Agents:
- In this current market of increasing interest rates, when taking a listing with an existing loan check to see that loan is assumable. If so, that fact can be used to help your listing stand out with buyers who may be interested in assuming a lower rate loan.
- Having the assumability of the loan information will also prepare you for when you receive an offer from a buyer asking for an assumption of the existing loan.
- If your seller is considering accepting an offer “subject to” the existing loan, advise your seller in writing against doing so and to consult with their qualified California real estate attorney.
- Be sure to advise seller to review the assumption documents from the lender to confirm that the seller is fully released from all future obligations on that loan. If there is any doubt, sellers should be advised in writing to consult with their own qualified California real estate attorney.
Both Agents: For more information on financing issues see Weekly Practice Tip “Handling Seller Financing”
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.