It's no surprise that in our current interest rate climate, consumers are trying to find any way they can to lower borrowing costs when they are purchasing a home. Over the last few years, interest rate buy downs have become ubiquitous, as have seller concessions (cash credits at closing to the buyer to cover things like loan origination costs, appraisals, and fees.)
One question we have gotten with some frequency recently has to do with assumable loans. A seller and their agent may offer an assumable loan in their advertising of a property online and this can pique the curiosity of buyers.
I have been diving into this scenario with Mike Echery with Green Light Mortgage. He has done some research into this and I wanted to pass along what we came up with. Let's start at the top 
So what is an assumable loan? And what do buyers need to know when considering a property with an assumable loan?
To start with, the most common kind of mortgage taken out in our area is a 30 year fixed rate conventional loan. However, other kinds of loans are available. One kind of loan that is available is a VA loan (VA stands for Department of Veterans Affairs) and you can consider using a VA loan if you are an active duty service member, veteran, national guard or reserve member, or surviving spouse.
VA loans are really neat because veterans are able to get attractive lending terms and put 0% down if they qualify. Another interesting aspect of VA loans is that they are assumable- meaning the loan can be passed to another person and the new borrower can assume the original interest rate and terms of the VA loan- even if the new borrower isn't a veteran.
But, this loan assumption isn't without regulations. So what does one need to know if they are interested in assuming a VA loan?
First, the veteran who holds the VA loan will give up their right to use the loan program for the entirety of time that the new borrower holds the loan. Until the new borrower pays off the loan or sells the home, the veteran will not be able to use this benefit. They won't be able to purchase a new home using a VA loan until the first loan is completed.
Secondly, the original lender who wrote the loan must approve the assumption as well as the Department of Veterans Affairs. The timing on how this happens is up in the air. I see online that this approval is supposed to happen within 45 days however online forums suggest people run into issues on timing frequently and the approval can take months.
Third, the new borrower needs to figure out how to make up the difference between the VA loan amount they are assuming and the purchase price. For example, if the purchase price of a home is 500K and the VA loan the purchaser wants to assume is 200K, the purchaser needs to figure out how to bridge this 300K gap. Until last fall, borrowers had to make up this gap in cash. There was no work-around so this made assumptions unappealing for most borrowers.
However, a couple lenders have now come out with products that allow a borrower to take out a second loan to bridge the gap between purchase price and VA loan. Mike said due to low availability of products in this realm, the terms may not be appealing but it is reasonable to expect more lenders could come out with products to increase consumer choice in this realm.
On the seller side, the practicalities of the loan assumption scenario are a bit odd, too. Although a seller may offer to pass along their loan to a new borrower, the seller may actually prefer to take a buyer's contract who is offering not to assume the loan. The uncertain timelines and the stipulation that the veteran needs to give up their right to use a VA loan for the duration the new buyer holds the loan make it a somewhat unappealing option for most sellers, too.
As it stands now, assuming a VA loan is possible, however, it remains uncommon. Mike said in his years of doing loans, he hasn't talked to an agent or lender that has actually completed the process. The uncertain timelines and the issue of making up the bridge between loan amount and purchase price has made it a "technically-feasible but practically-unlikely" scenario.
What do you think? Is this a scenario you'd want to explore if you were in the market?
