What is a Loan Assumption?
A loan assumption is when a new borrower takes charge of an existing loan from the previous one. This effectively releases the previous borrower and means the new borrower will be responsible for future payments. It’s common for loan assumptions to occur when purchasing or inheriting property.
Assumable loans present various benefits for borrowers and sellers. For example, if the loan has a low interest rate, the new borrower can save money on the transaction. Similarly, sometimes loan assumptions close faster than traditional loans, which can quicken sales for property sellers.
Read the rest of this article to learn about loan assumptions, such as if they’re right for you and when a lawyer can help you with them.
What are the Different Types of Loan Assumptions?
There are various types of loan assumptions, such as:
- Federal Housing Authority (FHA) loans. To be eligible for this government-backed loan, the borrower must meet credit and income requirements.
- Veterans Affairs (VA) loans. Many VA loans are assumable but the buyer will have to achieve credit approval.
- U.S. Department of Agriculture (USDA) loans. These loans are for people who earn low-to-moderate income and want to purchase a property in a rural area.
- Conventional loans. These are not as common as the previous types, but some might have a clause that permits assumable loans.
- Life events changing a loan. Some life events, such as death or divorce, can assume a property loan without a new loan being required.
How Do You Apply for an Assumable Loan?
To apply for an assumable loan, you’ll have to share documents to verify your information, such as your identity, assets, and credit. The loan servicer will review your loan application and tell you if you’re eligible to assume the loan.
When your assumable loan is approved, you’ll sign documents so that you can transfer the property title onto your name. During this time, the seller will receive a release of liability that essentially removes them from being responsible to pay off the loan, as that responsibility is now yours.
Buyer Tips for Assumable Loans
When you want to assume a loan, there are important tips to consider.
Review the Loan Terms
You need to take your time to carefully check all the terms in the loan agreement, such as the monthly payments and interest rate. These will help you to evaluate if taking on the loan will be advantageous for you.
Calculate the Remaining Balance
You should work out the difference between the property value and the balance remaining, which is what you’ll have to pay in cash. If you can’t fund the cash amount, you’ll have to try to get other financing options, such as a personal loan.
How much you’ll have to pay when you take over a loan varies depending on the following factors:
- Downpayment. As a buyer, you’ll have to cover the remaining balance between the property purchase price and the outstanding balance on the loan.
- Fees. There might be lender fees for processing the assumption.
- Closing costs. It’s common for closing costs on a loan assumption to be lower than a new loan, but there could still be expenses involved.
- Appraisal. If an appraisal is requested, it will be the buyer’s duty to pay.
What are Common Drawbacks of Loan Assumptions?
Although loan assumptions provide benefits, they can also have potential drawbacks. These include the following:
- The buyer might not have enough money for an upfront cash payment, especially since it’s common for loan assumptions to have high down payment amounts.
- The buyer might accept higher payments that they can’t afford to make. This is commonly seen with straightforward loan assumptions where lenders don’t have to approve buyers.
- Sometimes, the fees associated with loan assumptions can be more costly than expected.
Is a Loan Assumption Right For You?
Loan assumptions can be beneficial for various people, such as:
- Buyers who want low interest rates.
- Sellers who have great loan terms and want to sell faster.
- Military families, who can make the most of VA loans.
What are Legal Considerations of Loan Assumptions?
Before you take a loan assumption, there are legal factors to consider.
- A formal release is required to release the previous borrower from having to make payments.
- State laws need to be considered as rules and regulations can vary in different locations.
- It’s common for assumable loans to need approval from a lender before the loan can be assumed.
- If the loan is in default when the new borrower takes over, they might need to remedy the default to avoid a situation of foreclosure. They can do this by paying the overdue balance or by negotiating a repayment plan with their lender.
Do You Need a Lawyer for a Loan Assumption?
If you want to apply for a loan assumption, you might wonder if you need to hire a lawyer. This is generally recommended if you’re dealing with a complicated situation, such as a messy divorce, or if you’re unsure of how the process works.
A lawyer can help you in various ways. These include:
- Providing a legal review of all contracts so that they’re legally sound.
- Gathering all the documents you need when applying for the assumable loan.
- Protecting you, such as by clarifying all costs, fees, and potential risks.
- Using their in-depth legal knowledge to ensure you remain legally compliant according to all state laws.
- Assisting you with achieving financing, should this be required.
- Helping you to prevent disputes, such as if you’re applying for a loan assumption during a divorce.
Where can you hire a lawyer for a loan assumption?
You can quickly and conveniently hire a lawyer for assistance with a loan assumption on ContractsCounsel, an online legal network connecting clients with vetted lawyers. They have the legal expertise and experience to assist you through the entire process, giving you peace of mind so that you can feel confident about your loan.
