Assumable Mortgages

Assumable loans are a form of seller financing, and they are very rare these days. They happen when a seller wants to create an added incentive for a buyer and currently has a mortgage with a below-market rate that its lender says can be assumed by another borrower — in this case, the new buyer of the property.

Why are assumable loans so rare? Because when rates were high in the 1970s and 1980s, sellers having trouble selling their property with no restrictions on assumable mortgages offered that option to potential buyers looking for the lower fixed rates those original loans were made at. It was a tremendous sales tool at that time.

But private lenders — who like to see people come in for new, potentially higher-rate loans instead of getting unknown customers at an old, potentially lower rate — began to insert what are known as “due on sale” clauses in their mortgage language. This new language may allow assumption but only at a current market rate set by the lender. Generally the only lenders not carrying these restrictions are those making loans guaranteed by the FHA and VA as of fall 2007.

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