Loan Assumptions: Pennymac's Policies And Procedures Explained

Pennymac is a national home mortgage lender that offers a range of loan options, including conventional home loans, adjustable-rate mortgages, jumbo home loans, FHA home loans, VA home loans, USDA streamlined-assist refinance, and investment property loans. They also provide resources and guidance to help individuals make informed decisions about their mortgage choices. One option that Pennymac discusses on its website is the assumable mortgage, where a homebuyer can take over the seller's existing mortgage and its terms. This can result in significant savings due to lower interest rates compared to the current market. However, buyers typically need to pay the seller for any equity built up in the home, either in cash or through additional financing. While Pennymac provides information about assumable mortgages, it is not clear if they directly allow loan assumptions. Interested individuals can contact a Pennymac Loan Expert or a dedicated Pennymac Loan Officer to discuss their specific situations and explore available options.

Pros and cons of assuming a loan

Pennymac does allow loan assumptions, but it is subject to certain conditions. For instance, if you are a "Successor in Interest", you can access loan information and make payments. You can also apply to assume the loan, but this may require credit and income qualification.

Now, here are some pros and cons of assuming a loan:

Pros of Assuming a Loan

Assuming a loan can offer several benefits, including:

• Cost savings: If the interest rates have increased since the seller initially obtained the loan, assuming a loan with a lower interest rate can result in significant cost savings for the buyer.
• Lower closing costs: Assumable mortgages typically have lower closing costs compared to other types of home loans.
• No new appraisal requirement: Buyers can save money by skipping the appraisal process, although it is still recommended to conduct a home inspection.
• Long-term savings: With an assumable mortgage, you can save on interest payments over time since you are borrowing less money over a shorter period than with a new mortgage.

Cons of Assuming a Loan

On the other hand, there are also some potential drawbacks to assuming a loan:

• Limited loan options: Not all types of mortgage loans are assumable. Conventional loans, for example, generally cannot be assumed, while FHA, VA, and USDA loans are more commonly assumable.
• Down payment requirements: In most cases, you will need to make a down payment when assuming a mortgage, and it may be larger than expected if the loan balance does not cover the full purchase price of the home.
• Limited ability to shop around: Buyers are restricted to the original loan conditions set by the seller's lender, limiting their ability to find a more competitive interest rate or repayment term.
• Potential for non-approval: Buyers must still meet certain requirements set by the lender or investor, and there is a risk of not being approved for the assumption.

Qualification requirements

VA loans are also often eligible for mortgage assumptions. To qualify for a VA mortgage assumption, you must meet all VA standards for creditworthiness and income, and the assumption must be approved by both the VA and the lender. Additionally, the buyer assumes all mortgage obligations, including the obligation to repay the VA in the event of a default on the loan. Furthermore, the buyer is responsible for paying a "VA funding fee" equal to 0.5% of the current loan balance.

For conventional mortgages, qualification requirements for loan assumptions may vary by investor. It is recommended to check with the loan's servicer to determine the specific requirements for your scenario.

In the case of removing a former spouse from a mortgage, loan assumption may require credit and income qualification. Similarly, becoming a "Successor in Interest" due to being given an ownership interest in a property may also require credit and income qualification to assume the loan.

Additionally, Pennymac offers pre-qualification assessments for repayment plans or other home retention options. To determine pre-qualification, individuals must provide verbal financial information regarding their current income and expenses.

How to apply

If you are interested in applying for a loan assumption, you can contact a PennyMac Loan Expert to determine if you pre-qualify for a repayment plan or other home retention option. You will need to provide verbal financial information concerning your current income and expenses.

If you are assuming the loan of an inherited property, you may be within your rights to avoid an assumption fee. However, it is recommended that you consult an estate attorney if questions arise.

If you are assuming the loan as a Successor in Interest, you will need to provide documentation such as a divorce decree, the deed showing the property transfer, a copy of your photo ID, and your contact information. Additional documentation may be required.

If you are assuming the loan as a buyer, you will need to pay off the entire past-due amount before the assumption can occur. This can be done with cash or through a separate loan. You will also need to provide financial documentation and meet the lender's credit and income requirements. This can include pay stubs, bank statements, W2s, and other documents to prove your ability to take over the mortgage.

If you are assuming a VA loan, you must meet all VA standards for creditworthiness and income, and the assumption must be approved by both the VA and the lender. You will also be responsible for paying a "VA funding fee" equal to 0.5% of the current loan balance.

Loan types

Pennymac offers a range of loan types to suit different financial situations. Here is an overview of the loan types available:

Conventional Home Loans

A conventional home loan is a popular and well-known option with a low-rate and fixed-interest rate for the duration of the loan. This type of loan offers flexibility and no mortgage insurance if you put at least 20% down. The loan amount is limited and must adhere to the guidelines provided to Fannie Mae and Freddie Mac by the Federal Housing Finance Agency (FHFA). For 2023, the maximum conforming loan limit for most of the US is $726,200, with a higher limit of $1,089,300 in areas with high housing costs, such as San Francisco.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARM) offer an initial period of low principal and interest payments with a fixed rate, typically for 3 to 10 years. After this initial period, the interest rate becomes variable and adjusts periodically. This option may be suitable for those who want to take advantage of the low initial rates and are prepared to accept the risk of variable rates in the long term.

Jumbo Home Loans

Jumbo loans are a type of non-conforming mortgage used to finance a higher-priced home. These loans exceed the limits set by the Federal Housing Finance Agency, allowing homebuyers to purchase homes in a higher price range.

FHA Home Loans

FHA loans are backed by the federal government and are free from the restrictions of due-on-sale clauses commonly found in conventional mortgages. This type of loan offers flexible down payment options and an easier qualification process with the right credit score.

VA Home Loans

VA loans are another type of loan backed by the federal government, offering various advantages and benefits beyond down payments. These loans can help homebuyers buy or refinance a home easily and save money.

USDA Streamlined-Assist Refinance

USDA Streamlined-Assist Refinance loans are available for those who meet certain eligibility requirements.

Investment Property Loans

These loans are designed for those looking to invest in property and may include options such as bridge loans, which are short-term financing solutions until long-term funding can be secured.

Home Equity Loans

Home Equity Loans allow you to convert your home equity into cash. There are different options available, such as a Home Equity Line of Credit (HELOC) or cash-out refinancing.

First-Time Homebuyer Loan

Pennymac also offers loans tailored to the needs of first-time homebuyers, with guidance on the requirements and qualifications needed.

The impact on your credit score

Pennymac does allow loan assumptions, which can be made by a "Successor in Interest". This status gives the individual certain rights, such as access to loan information and the ability to make payments. However, they are not liable for the debt. To become fully financially liable, a "Successor in Interest" must apply for an assumption, which may require credit and income qualification.

Loan assumptions can impact your credit score in several ways. Firstly, the application process for a loan assumption involves a credit check, known as a hard inquiry, which typically causes a small, temporary decline in your credit score. If the application is approved, your credit score may drop a few more points as the new credit line decreases the average age of your accounts.

However, if managed responsibly, a loan assumption can positively impact your credit score in the long term. Proper management of the loan can demonstrate your creditworthiness and ability to handle debt. This can lead to improvements in your credit score over time, depending on your credit history and other debts.

Additionally, loan assumptions can help with debt consolidation. By applying funds borrowed at a lower interest rate to pay off higher-interest debt, you can reduce your overall debt obligations. This can positively impact your credit score by lowering your credit utilisation ratio and demonstrating responsible debt management.

It is important to note that the impact of a loan assumption on your credit score may vary depending on other factors, such as your payment history, total debt load, types of credit used, and the length of your credit history. The improvement in your credit score will depend on your overall credit profile and financial behaviour.

Furthermore, in the case of assumable mortgages, the seller is typically still responsible for debt payments unless they obtain a release from the lender. If the seller is released from liability, the buyer assumes the mortgage and makes the required monthly repayments, which can build their credit score over time if managed well.

While loan assumptions can have both positive and negative effects on your credit score, it is important to remember that other factors also influence your overall creditworthiness. Lenders consider multiple aspects when assessing your creditworthiness, including your income, employment history, and overall financial stability.

Frequently asked questions