An assumable loan may offer less than youve assumed

Here's another example from my experience—only this time I won, the sellers lost; and the bank pulled in more profit. The sellers had lived in their newly acquired home for nine months; then their employer told them to transfer to Denver.

To qualify for their loan, these sellers had bought down their interest rate for three years to 10 percent—against a market rate of 12.5 percent. Very expensive buydown! "At least," they thought, "we won't have any trouble selling our house. Thankfully, we can offer a buyer our assumable mortgage with that great, below-market 10 percent interest rate." They were right. As soon as I saw the deal they presented, I bought. Unfortunately for the sellers, the bank refused to honor the assumption language the sellers had advertised and incorporated into our agreement.

Assumable Loan, Yes. Assumable Rate, No.

Although the lender quickly approved me for the loan assumption, it refused to approve the below-market rate. "Sorry," the bank told the sellers, "we'll only go forward at the 12.5 percent mortgage contract rate." Outraged, the sellers responded, "What do you mean? We just paid thousands of dollars for that buydown less than a year ago. You're telling us that we just poured that money down a rat hole."

"Now, now, Mr. Seller, we at the bank are sorryyou feel that way, but our hands are tied. The contract clearly states that we will approve assumptions only at the loan contract rate, not the buydown rate. I know headquarters would never let this assumption go through at 10 percent."

"Why did you emphasize to us when we got this loan that it was assumable if it couldn't be assumed at the 10 percent rate," the seller angrily contested.

"We don't recall you asking about that at the time. Did you?"

"No, I didn't ask," the seller shot back, "I just assumed that the rate we bought is the rate the buyers would get."

"Well, as we said, Mr. Seller, we're truly sorry about your misunderstanding. But there's nothing we can do."

What Happened?

My purchase contract with the sellers specified that (subject only to loan qualification) I could assume their mortgage at 10 percent. It did not give the sellers an escape hatch. To fulfill their obligation under the contract, they had to again pay the bank thousands of dollars to buy the rate down for me. They were not happy campers. They threatened to sue the bank, but in Dizzy Dean fashion, their lawyer warned that they had only two chances of winning: slim and none. In any event, legal costs would swamp any court victory—even in the improbable event that one was achieved.

The Moral: Don't Assume Anything about the Assumption Clause

Your loan rep may point out that the loan you're originating includes a much-desired feature. "It's assumable," she says. You respond, "Sounds good, but tell me more.

  • At what interest rate?
  • What credit and qualifying standards will apply to my buyers?
  • What amount of assumption fee must the buyers pay? What other closing costs or settlement fees will be levied?
  • Will the buyers retain the contract right to streamline refi if market interest rates drop?
  • Will you require an appraisal for the property at the time of the assumption? If so, what's the maximum loan-to-value ratio that will gain approval?
  • Is this assumption a one-time shot? Or, can the new buyers pass the loan along to their eventual buyers?
  • Is the assumption only available to owner-occupants, or can investors also assume the loan?
  • If the loan is an ARM), will the buyers retain the right of conversion? Can the periodic or lifetime caps change for the new buyers?

"And while we're talking about it, would you please show me the contract terms, documents, or riders that specifically address each of my concerns and questions?"

To know that buyers can assume your loan is really to know nothing at all. The devil may lurk in the details. In times of higher market interest rates, tighter qualifying standards, or excess housing inventory, assumable mortgages provide sellers a competitive advantage. Their properties sell faster and at higher prices, but only if that assumable conveys benefits that new originations don't offer. (Note: As mentioned earlier, investment properties frequently carry assumable loans. So, if originating or taking over such a loan, review its terms and conditions closely.)

Assume nothing about your assumable. Verify facts.

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