Home Loan Assumption: Is It Right for You? | Real Estate Investing Q&A

Zillow real estate investment writer and long-term investor Leonard Baron, MBA, is answering questions from MintLife readers.

If you have a question about investment properties, cash flows, insurance, mortgage financing, homeowners associations, renting versus owning, foreclosures and more, drop Leonard an email.

Assuming a Home Loan

Neri of Yuma, AZ asks:

I wanted to know if assuming a loan is a wise idea.

I have great credit and money saved. Would this be a good option for me? 

The house I’m interested in is for sale by owner. The owner wants $284,000, and Zillow estimates the house value at $235,000.

Would taking over payments and giving cash for equity be a good idea? How about taxes?

Answer: I see you have a couple of questions here.

The first question seems to be whether assuming a loan is a wise idea. I’ll answer that second.

One of the most important principles in making smart real estate purchase decisions is to buy properties you will own for a long time.

In order to do this, you should buy properties that fit well with your reason for purchasing property in the first place, and that are smart financial decisions.

A very small percentage of homes for sale in a given area are available with assumable loans (roughly 5 to 10 percent).

My first question to you is whether this assumable loan-type property is the right property for you for all the reasons you want to buy real estate?

If not, hold out for one that suits you, especially since you could probably get traditional financing.

Most people who buy homes with assumable loans are doing so because they can’t get traditional financing.

And, the sellers often ask too much for these properties.

This is likely the case for the property you’re considering based on the home value estimates you provided.

You should also consider the interest rate on the assumable loan.

If it’s a high interest rate, it doesn’t make much financial sense to assume it, especially since you could likely get traditional financing at a low rate.

Title Insurance

Mark of Fredericksburg, VA asks:

I’m buying a home, and the seller is purchasing title insurance for me. Why do I need to also pay for a separate policy – it’s on my estimated settlement sheet?

Answer: Who pays for the title insurance can vary by local custom in different areas and/or by what the parties agree to in the contract.

It’s typical in California that the seller pays for a policy for the buyer, and the buyer pays for a policy for the lender.

It seems like you are paying for a policy for your lender. Assuming you are financing the property, the lender will require a policy so they are protected in case of a title issue.

While the seller’s policy is typically for the full amount of the purchase price, you normally buy a policy for the lender that is only for the mortgage amount.

It seems redundant to buy two separate policies that essentially cover the same thing. But as of now, lenders require their own policy to protect them.

As far as I’m aware, title insurance companies do not sell a combined policy that covers both the buyer and lender.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Leonard Baron, MBA, CPA, is Zillow’s real estate investment writer, a San Diego University lecturer and real estate due diligence expert. As America’s Real Estate Professor®, his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.