What is a Loan Assumption?
By Autumn Allen | January 10, 2024 | TRENDING TOPIC
Introduction
What is a loan assumption? You may have been hearing this as a buzz word and wondering, what is this, and can it help me save money?
Sounds intimidating, but it is one of the best ways to buy a house.
In human speak, a loan assumption is when a buyer would take over and “assume” the seller’s current home loan, instead of having get a whole new, usually more expensive loan for the same home.
So how does this actually work? Let’s take a look!
How it Works w/Numbers Example
Let’s say that you need to sell your home, but you want to know where you are headed first.
So, you start to look online to see what’s for sale. Let’s say you found just the right home in a quiet neighborhood, 4 bed 2.5 bath with a 2 car garage in Steilacoom WA and a large lot. Let’s call it 123 Apple St.
It’s for sale for $700,000.
Normally you connect with the mortgage lender through your real estate agent or find a one online, and they will provide a typical scenario like below:
For an asking price of $700,000 at a 7.5% rate with 0% down VA loan down with no monthly PMI (private mortgage insurance), your payment estimate would be roughly $5618.
This may work for you, but why pay this much when the seller may have an assumable mortgage?
Check this out. This is where it gets interesting.
Your creative buyer’s agent finds out that that the seller currently pays $2,700 a month with a 2% interest rate with a VA loan.
That’s a paying $2978 less a month for the same home!
Taking over this loan is called assuming it. And all government loans are assumable!
Fill the Gap (Seller’s Equity)
We aren’t quite done yet. We still need to fill the gap. This is the difference between the current loan balance and the current market value of the home in order to complete this transaction. The seller still needs this as part of their proceeds that they worked hard for.
For easy math, let’s assume the current loan balance is $500,000.
The market price is $700,000.
So there is a gap of $200,000 that needs to be paid to the seller at closing. What now?
Amy & Autumn (Loan Assumption Team)
Our Awesome Assumable Home Program
The number one question I am asked: what if I don’t have those funds?
I have some amazing news! I wanted to solve this problem, so I decided to interview lenders around the Sound, I found one that will provide a 2nd loan to fill this gap at closing so you don’t have to! It’s a one of a kind program made for situations like this to save you money!
*The program does ask for 10% of the listing price as the down payment, and they will fund the rest of the gap.
What’s Your Final Monthly Payment?
To finish our example, we discussed:
Sale Price: $700,000
Loan Balance: $500,000
Gap: $200,000
Out of Pocket for Buyer: $70,000, Lender funds the $130,000 w/2nd loan
2nd Loan Payment: $130,000 at 6% over 30 years, adds $779
Benefits: Lower Monthly Payment ($2700 + $779) = $3,479 VS $5,618
Sum up the Savings
You saved money in 3 ways my friend.
Upfront
First, you saved on the amount of down payment needed versus having to fund the gap in equity yourself.
Monthly
Next, you are saving EVERY single month by having a lower monthly payment.
In this example, Your monthly savings of $2,139 x 12 months = $25,668 extra in your pocket. Which gives you an extra $128,340 every 5 years in this example.
Yearly
Lastly, you’re savings hundreds of thousands in interest over the life of the loan.
This strategy in this example saved you over a million dollars over the life of the 30 year loan
Check out how much interest is paid over the life of an loan:
The high interest plus principal above, would pay for 2.5 homes at 30 years time.
Why haven’t I heard anything about this?
Regular loan assumptions have been around a long time. Usually it only comes into style when rates are pretty high aka now. They do take longer than a regular loan to close, so that can give you more time to plan as well. A lot of real estate professionals have not heard or been taught about assumptions, so don’t be surprised if you get some resistance or confusion from them. I highly recommend booking a short call with me so we can learn more. After all, it’s about you and your journey. You definitely deserve to get what you want, and get the best deal in the process!
TL:DR?
A loan assumption is one of the most underrated but beautiful strategies to buy a home in today’s market, saving you thousands in the short term and millions in the long run. For sellers, it’s a very attractive way to present your listing, and for buyers, you get killer savings.
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About the Author:
Autumn Allen
Hey Pierce County, I’m Autumn Allen! I’m the owner of Lux Solaris and I am dedicated to sharing handcrafted information about creative real estate. I’m very grateful to guide all my clients through their real estate needs with precision and care. Thanks for reading!