Let’s Resurrect Assumable Loans

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by Roberta Murphy

assumable loans
Keys to San Diego Home

Why not resurrect assumable loans for real estate?

The health of the San Diego real estate market hinges not only on home buyer demand, but also the ability of buyers to secure financing.  At the same time, lenders are overwhelmed with short sales and foreclosures that hurt not only their balance sheets, but tear down neighborhood values as well.

It’s become an ugly cycle that needs serious correction–and I can’t help but wonder about reviving assumable loans in our real estate markets.

Years ago, as a Texas Realtor, a good percentage of our transactions involved the buyer’s assumption of the seller’s existing loan. Some of those loans were fully assumable, while others required lender approval.

How did this work?

Let’s use a simple example: Seller Jones has an outstanding mortgage balance of $150,000 and is willing to accept a $195,000 sales price.  Buyer Smith pays $45,000 plus closing fees and assumes the existing financing.  Seller leaves with that amount, less closing costs. Future mortgage payments are now made by Buyer Smith.

In some cases, lenders (and sometimes the Seller) would offer secondary financing to help with the difference between asking and sales price–as long as the buyers had a cash stake in the deal. And sometimes, to help facilitate a transaction, real estate agents took part or all of their commissions as a note.

I can’t help but wonder why mortgage lenders don’t revive the assumable loan, help kick start the real estate market, and save at least a portion of their own and investors’ portfolios in the process?

In many cases, sellers have no equity. Why not allow them to offer their mortgage debt (or renegotiated debt) as assumable financing for potential buyers? Lenders might be relieved to have mortgage payments brought current–and might even require the new buyer to deposit two or three month’s payments with them as insurance against future default.

By allowing assumable financing, lenders would fare much better vis-à-vis short sales and foreclosures–and more homeowners would be able to save their credit and exit their situations with dignity.  Most lenders now force homeowners to be in default with their mortgage before they will even consider a short sale or modification of terms.

It just makes sense to get the mortgage debt seamlessly transferred before it ever goes default.

And with strangled liquidity in financial markets, it makes more sense than ever to transfer debt rather than forcing buyers to secure new financing–which may or may not be available.

 

 

 

 

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7 responses to “Let’s Resurrect Assumable Loans

  1. Brad: You have found what I believe to be an emerging niche in the real estate market. Now to go pound on the lenders!

  2. Keahi: To the best of my knowledge, only VA loans require the Veteran to remain on the hook. Perhaps someone can correct me?

  3. I completely agree with you, Roberta. Doesn't it make more sense for lenders to allow buyer's to assume a loan? It would alleviate all the hassle and paperwork of foreclosing on a home. I thought many banks practice this, but discovered that this type of transaction is very hard to come by.

  4. This is how back in 1990 in Texas, we purchased our first home. We later refinanced it. It worked out perfectly. I told my husband the other day, I bet assumables will make a comeback. This is an answer to today's real estate woes.

  5. Maria: I know this would be a welcome move in the San Diego real estate market–and would likely be welcomed by mortgage investors as well (compared to the alternative of foreclosure or short sale).

  6. Jlynn: When I started out in real estate, I did so in Houston, Texas. In those days, all government loans were assumable–as were some conventional ones. It would be a good idea for lenders and guarantors to revisit the idea of assumable loans to help stem the tide of short sales and foreclosures–and provide buyers with a tool for purchasing homes.

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