You may already be aware of some of the key benefits of USDA loans like the 0% down payment option, no prepayment penalty, and the ability to roll your closing costs into the loan so you don’t have to pay them out of pocket.
But did you know that USDA loans are also assumable? That means a homebuyer can take over an existing USDA mortgage for a homeowner, keeping the terms of the loan the same.
In this post, we’re going to take a closer look at assumable USDA loans. We’ll discuss the benefits for the buyer and the seller. And we’ll explain how an assumable mortgage works when the USDA is involved.
Why Would Someone Want to Assume a USDA Loan?
There are two main reasons a buyer might want to assume a USDA loan:
- To keep a lower interest rate. When interest rates are rising, assuming an existing loan with a lower interest rate might be the only way to get a rate that low.
- To avoid the upfront guarantee fee. Guaranteed USDA loans come with an upfront fee of one percent. What is a guaranteed USDA loan? A guaranteed USDA loan is a loan provided by a private lender but backed by the US Department of Agriculture. This fee covers the USDA’s underwriting to make sure they can confidently guarantee your loan. One percent might not sound like much, but on a $250,000 home with 0% down, buyers could save $2,500 upfront by assuming a loan instead of originating a new loan.
Buyer Benefits of Assuming a USDA Loan
The buyer benefits from assuming a USDA loan by:
- Getting a potentially lower interest rate, and
- Avoiding the upfront guarantee fee.
Seller Benefit of Assuming a USDA Loan
The benefit to the seller is that they can offer more competitive terms for buyers. During a buyer’s market, when there are many homes available and buyers have their pick of properties, sellers can give buyers an additional incentive to purchase their property by offering a mortgage assumption.
Potential Downsides of Assuming a USDA Loan
There are a few potential downsides of assuming a USDA loan that both parties should be aware of:
- Buyers might need a high down payment to buy out the sellers. A USDA borrower can have a lot of equity established in their home. And since the buyer is assuming the loan, the only way for the seller to cash out their equity is to have the buyer pay them directly.
- Buyers still need to be approved by the lender. If the buyer doesn’t qualify for the loan, they cannot assume it.
- Mortgage insurance payments. The buyer will assume the mortgage insurance premiums along with the loan.
How Does an Assumable USDA Mortgage Work?
With an assumable USDA mortgage, the buyer would simply continue making the mortgage payments under the same terms as the original homeowner’s mortgage. The seller is released from the obligation to repay the remaining balance.
But the buyer still needs to apply with the seller’s lender. The buyer will need to qualify for the loan based on credit score, the debt-to-income ratio, and USDA income limits.
Because USDA loans come in 30-year terms, there is a wide range of possible equity the owner could have in the property. This is important because the buyer will need to buy the seller out of their equity to assume the loan. If the owner is 25 years into a 30-year term, you can bet they’ll have lots of equity because of their debt paydown and the property appreciation. So an assumption might not make sense. But if the seller is only two years in, the buyer might not have any trouble coming up with the funds to cover the seller’s equity.
Does USDA do a 15-year loan? Nope. Guaranteed USDA loans currently only come in 30-year fixed terms.
We’re Here to Help!
Do you have questions about your mortgage loan options? Call the experts here at OVM Financial today at 757-296-2148. Or, if you’re ready to apply for a mortgage, you can start the process online at https://www.ovmfinancial.com/online-application/.