As we head into 2019, we expect to see mortgage rates continue to rise. That doesn’t mean potential homeowners should avoid the process altogether.
Mortgage rates are still low compared to a generation ago. However, we have become accustomed to rates around 3 or 4 percent, so any increase makes people uneasy — even though higher rates are a sign of a healthy economy.
If you want to buy a home this year, consider this outside-the-box idea: an assumable loan. The feature is available on loans from the Federal Housing Administration and the Veterans Administration. “Assumable” means when the homeowner sells a home, the buyer may be able to take on the existing loan and terms (e.g.: rate and remaining loan amount).
At closing, the purchaser pays the seller the difference between the outstanding balance of the loan and the sales price. For instance, let’s say you, the homeowner, sell your house with a sales price of $300,000, and your loan payoff is $250,000.
For the buyer to assume your loan, the person needs to pay the difference (in this case, it’s $50,000). The buyer can bring the amount as a down payment, receive a gift or other options pending lender approval.
In the example I shared, the buyer then takes over the loan with a balance of $250,000 and the same original terms (interest rate and the remaining years on the loan).
In addition, closing costs with the assumable loan feature are far less than a traditional home purchase. That’s because many of the fees don’t apply because you are taking over an existing mortgage.
If you have a VA loan right now and are interested in the assumable loan feature to sell your home, you need to understand two key points.
First, it’s in your best interest to sell your home to another person who has VA eligibility and request that your eligibility be substituted with the VA buyer’s eligibility. That’s because your loan is connected to your VA eligibility. If you don’t sell to another veteran, you may lose the entitlement to buy another house with VA entitlement until the new homeowner pays off the mortgage balance or releases the loan.
Second, if the new homeowner (who does not have VA eligibility, or you did not substitute it) defaults on the payments, it goes on your VA record and you may lose your eligibility altogether.
For those two reasons, it’s important to do your research and make sure the buyer has VA eligibility.
To be sure, anyone interested in the assumable loan feature must go through the approval process like anyone else with the current lender on the property. That means the current lender should do a credit check, income verification, etc.
Whether you plan to buy or sell a home this year, talk with a mortgage professional to see if an assumable loan feature is best for you.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake. She specializes in lending for the millennial generation. Sign up today for Shikma’s free webinar, “First-Time Homebuyer Crash Course,” at shikmarubin.com/webinar. You can reach her at srubin@tidewaterhomefunding.com or 757-490-4726.