In today’s housing market, high home prices and rising mortgage interest rates are creating challenges for homebuyers. However, some resourceful buyers are finding a way around these obstacles by seeking sellers with assumable, low-rate mortgages.
An assumable mortgage allows a buyer to take over the seller’s loan with the same interest rate, payment, and schedule. Typically, these loans are backed by federal agencies such as the Veterans Affairs Department (VA) or the Federal Housing Administration (FHA). These government-backed loans assure lenders they will be compensated if the borrower defaults.
The Appeal of Assumable Mortgages
Many VA and FHA loans offer significantly lower interest rates compared to current market rates. Approximately 80% of outstanding VA mortgages have a sub-5% rate, with many even below 3%. Together, VA and FHA mortgages make up about 25% of all mortgages. While only a small fraction of these homes are on the market at any given time, the popularity of assumable loans is increasing. For example, the number of FHA mortgage assumptions rose from 3,825 in 2023 to 3,477 in just the first five months of 2024.
Finding Assumable Loan Opportunities
Some companies are helping buyers identify assumable loan opportunities. Launched in September, Roam offers an online search feature and fee-based services to assist buyers in navigating the mortgage assumption process. Sellers can also use Roam to highlight the added value of their assumable mortgage.
Roam’s search feature displays homes for sale with assumable mortgages, making it easier for buyers to find these opportunities.
Requirements and Considerations
Assumable mortgages come with specific requirements. For instance, while you don’t need to be a veteran to assume a VA loan, you must meet certain credit and debt-to-income ratio criteria. The FHA has similar requirements. Additionally, buyers must cover the difference between the purchase price and the remaining mortgage balance, which may require substantial funds. Lenders may offer a second loan to cover this gap, but it will be at current market rates.
For veterans, assuming a VA loan can offer a competitive advantage. If the seller transfers their mortgage to a non-veteran, their VA loan eligibility for future purchases could be affected. Conversely, a VA-qualified buyer can assume the loan without impacting the seller’s VA benefits.
Challenges of Assumable Loans
Despite the benefits, assumable loans can involve more work and a slower closing process compared to cash offers. Loan servicers are often reluctant to facilitate these transactions due to the costs involved. According to Ted Tozer of the Urban Institute’s Housing Finance Policy Center, servicers lose money on each assumption due to substantial costs not covered by the fees they can charge.
Conclusion
Assumable mortgages present a valuable opportunity for homebuyers to secure lower interest rates in a challenging market. By meeting the necessary requirements and navigating the assumption process, buyers can achieve more affordable homeownership.
