Assumable loan?

Question

As stated in biggerpockets Real Estate glossarry,

Assumable Loan - A loan in which the lender is willing to Ã‚â€œtransferÃ‚â€ from the previous owner of the home to the new owner, sometimes at the same interest rate, sometimes at a new rate. An assumable loan can make your home more attractive to buyers when you want to sell.

Questions - When the loan is transfered, does it only include what is left of the principle and interest? In other if it is a $100,000 loan and the first owner paid $40,000, does that mean that I am only responsible for the remaining $60,000?

Secondly, "An assumable loan can make your home more attractive to buyers when you want to sell. "

How is this so? What exactly makes this more attractive? Is it saying if I am the one transferring the loan to a second individual? The second individual being the one to take on the assumable loan.

I have not been able to find much information, on this site, on the subject. I would appreciate any clarification. and/or and article/blog/forum that can help in my understanding.

Thanks, Amy

Jon Holdman · Answer

The assuming person is only responsible for the outstanding balance.

Some old loans can be assumed without lender approval.  That makes them attractive because you can buy the house and assume the loan without the lender having to approve it.

Before you go getting your hopes up, these are essentially non-existent for residental loans.  They went away about two decades ago.  So, it would have to be a very old loan, and the balance would certainly be very low compared to the property value.  So, you'd have to get a new loan or pay cash for a big chunk of the value.

They're more common for commercial loans, but the lender typically does have the right to approve the new borrower.

Bryan Hancock · Answer

Another thing to consider is that many buy-and-hold investors are bounded by the vagaries of the conforming loan market.  There are several threads on this right now.  Lenders set limits on the number of conforming loans they will issue to any particular borrower.  There are several ways to structure your balance sheet, income, etc. so that this problem is minimized.

However, there ISN'T a way to eliminate artificial bounds on things like experience.  A buyer could have $1M liquid, perfect credit, know what they are doing, etc. and the conforming lender can deny the loan because of experience requirements.  Subject-to purchases are a way around this artificial bounding.

Subject-to purchases also allow one to purchase property quickly when a conventional loan won't work.  Sellers in distress often don't have time to wait for someone to find a loan product and thus this is a solution.  Investors seldom have the cash to finance high deal flow so subject-to purchases are a way to conserve valuable cash for when all-cash offers are the only solution.

Three of the four value centers in real estate have nothing to do with purchasing homes at a 30%+ discount and/or cashflowing.  Consequently, many buy-and-hold investors are willing to accept a smaller discount because they are banking on a large reversion cash flow for projects they acquire.  Many people label this "speculating" and hound these folks because they don't have positive cash flow.  The truth is that almost all SFRs with normal loan to value ratios have negative cash flow.  This is a function of bidding with owner occupants for the same product.  Eliminating all property purchases because they don't "cash flow" with some artificial rule discounts:

1.  Appreciation
2.  Amortization
3.  Tax advantages

Many people can feed properties for several years while hedging inflation, using tax shields to reduce taxable income, etc.  Not everyone's situation is the same and thus not everyone invests the same.  Appreciation plays are often educated guesses for those with the capacity to do so.  Subject-to investing allows them to do so across more bets after their conforming "bullets" are burned.

Subject-to purchases are a tool like many other tools in real estate investing.  Any tool can be used correctly or can be abused and get an investor in trouble.

Jon Holdman · Answer

"Subject to" means taking over the payments and buying the house but leaving the existing loan in place.  This violates the due-on-sale clause, but appears to unlikely, for now, to result in any action by the lender.

Portfolio loan is one that's held by the lender.  This is uncommon for residential property.

Conventional loan is one that the lender sells to Fannie Mae or Freddie Mac.  "Conventional" refers to the rules set by these two quasi-governmental companies.

Jon Holdman · Answer

Yes, there is a better way.  The buyer gets a new loan and pays off the old one.  Its that simple.

Usually when a buyer is trying to buy subject to it is because they have some issue that prevents them from just getting a loan and buying the property in the usual way.  Usually that's either the lack of a down payment or its the inability to qualify for the new loan (credit score, include, assets.)

IMHO, subject to makes sense only under a specific set of circumstances.  One is a very desperate seller.  Not hard to find that sort of deal these days.  The seller must have a fixed rate, long term loan where the balance is in line with the value.  Investors, at least ones that intend to make money, NEVER buy at market value.  Buying at 70% of value, less the work needed, is a rough rule of thumb.  So, if an investor finds a desperate buyer with a good mortgage at the right balance, the investor might be able to buy the property for a small amount of cash and taking over the loan.

Yes, there is very real risk to both the investor and to the seller.  Personally, I'd never sell a property this way, and so I find it hard to imagine when I would buy this way.  But under the right circumstances, it allows a buyer to get into a property that they couldn't otherwise buy.  So, the upside (no credit qualification, small down payment), might outweigh the risks.

The one situation where it might make sense is a fix and flip.  You buy the property subject to, do the rehab, sell it, and pay off the loan.  If you have the cash to do the rehab plus give the seller whatever they want, and can make the payments, then you have much cheaper money than hard money or even most private lenders.  When you sell, you pay it off, so you avoid the long term risk.

Nevertheless, I do know that people buy subject to, and hold the poperty long term.  I think the risk is quite low for the moment, since rates are low and banks are busy with the foreclosure mess.  If rates were to rise (residential mortgage rates were in double digits when I bought my first house) and the banks get their backlog cleared, I think they will start going after subject to deals.

Bryan Hancock · Answer

Unfortunately it is what it is Amy.  You can read a lot more about the history of the due-on-sale clause here:

Due-On-Sale History and Overview

Amy Airheart · Answer

Correct me if I am wrong but there should be a better way than a subject to, not saying there is, but there should be. 
Firstly, to protect families who do not understand the possible risks of a subject to aggreement. Example being the person in whom they sold their property to not making payments on the mortgage. 
And secondly to protect investors. in the event that the due on sale clause is enforced.The investor is likely to not have the money to pay the mortagage in full. Most likely if they did have funds to do so they would not of pursued a subject to, to begin with.There should be a better way for investors to come to an agreement with the lender and still be able to take over the mortgage, in the process excluding any risk of the due on sale clause. (which with what I have read is an unlikely outcome so long as payments are being met on time.)
Correct me if I am wrong on any point. And please if you have anything to add, I would enjoy hearing it. I am just learning and I do appreciate andy feedback. - Amy

Amy Airheart · Answer

Thank you Mike.
to be honest no I didn't fully understand what Mr. Hancock was saying. There were a few terms that I needed to google to understand. Thank you for your reply. - Amy

Mike G. · Answer

Amy, there are many people in the position you describe.  Just because you can't assume their loan, doesn't mean you can't take over their loan payments using a subject-to-mortgage purchase.  That's what Bryan is saying.  Maybe you already understood this, but I wanted to point it out just in case you didn't.

Amy Airheart · Answer

I completely understand now. I was making the assumption that someone interested in selling their house with an assumable loan, would be doing so to prevent foreclosure or to get out from underneath a loan. And to prevent the damage to one's credit that a foreclosure causes.
I thank you again. - Amy

Bryan Hancock · Answer

This is true...I was going to mention it, but you were doing such a nice job of explaining things it didn't seem appropriate.

I am guessing portfolio loans would be freely assumable with lender approval too.  Most of the property you go after is likely to have conforming loans though, which will require a subject-to purchase in lieu of an assumption to avoid qualifying for a loan.

Assumable loan?

Most Popular Reply