Formal Assumptions

By Jim Palmer Jr.

Back in the old days of my real estate career (almost 3 decades), formal and simple assumptions were common place. Like high buckle shoes, that practice quickly went by the wayside, but evidently is not totally extinct. While we won’t ever again see simple assumptions, formal assumptions have made a comeback. The Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law by President Obama in July, 2010, included the provision that FHA and VA loans could be assumed by purchasers as long as they qualify just like the original borrower did. That means that the borrower must have sufficient credit worthiness, the ability to pay and an acceptable debt-to-income ratio.

Now that interest rates are climbing, spoiled consumers are worried that they will never see those low rates again and experts predict that we may soon see rates as high as 6%. One tool available to thrifty consumers is an assumable loan. Astute brokers can write offers that are contingent upon a formal assumption of the existing loan. The amount of cash down payment a buyer needs for this type of scenario depends on the balance of the existing FHA or VA loan, but in many cases it would require a large down payment.

The singular advantage of assuming one of these loans is the interest rate. Many of these loan types were created when interest rates hovered between 2 -4%. When market rates are low we hear little about assumptions, but as market rates increase we’ll hear more buzz about this topic and savvy consumers will quickly catch on! Think about it, if a home seller has an assumable 2.5% mortgage and the best the buyer can get in the current market is 5%, both parties would likely be better off if the buyer assumes the 2.5% loan.

One distinct benefit of a VA loan is that it can be assumed by someone who has never been in the military and has no VA eligibility. That may get the veteran off the hook for the loan so they can move on, but they would not recover their full eligibility for a new purchase until the assumed loan is paid off. A distinct benefit to the buyer and the seller on FHA or VA assumptions is that there is no need for a new appraisal, which streamlines the process and lowers the cost. Once the loan has been assumed, the seller is “off the hook” and can move on.