With stubbornly high house prices and rising mortgage interest rates, homebuyers are facing significant challenges. Many resourceful buyers are finding ways to navigate this difficult landscape by seeking sellers with assumable, low-rate mortgages.
An assumable mortgage allows a buyer to take over the seller’s existing loan with the same interest rate, payment, and schedule. Typically, only loans backed by federal agencies such as the Veterans Affairs Department (VA) or the Federal Housing Administration (FHA) are assumable. These agencies guarantee lenders that they will be compensated if the borrower defaults.
Approximately 80% of outstanding VA mortgages have rates below 5%, with many even below 3%. Together, VA and FHA mortgages make up about 25% of the mortgage market. Although only a small fraction of VA or FHA-backed homes are available at any given time, the number of mortgage assumptions is rapidly increasing. For instance, FHA mortgage assumptions rose from 3,825 in all of 2023 to 3,477 in just the first five months of this year.
New firms are emerging to help buyers find assumable loan opportunities. Launched in September, Roam offers an online search feature and fee-based services to help buyers navigate the assumption process. Sellers can also use Roam to highlight the extra value of their assumable mortgages.
However, not everyone can assume an existing mortgage. While you don’t have to be a veteran to assume a VA loan, you must meet certain credit requirements and fall within a specified debt-to-income ratio. The FHA has similar criteria. Additionally, buyers need to cover the difference between the purchase price and the remaining loan balance, which may require substantial funds. Lenders facilitating the assumption may offer a second loan, but at current market rates.
Using an assumption to reduce your mortgage rate by five points can lead to more affordable homeownership. Veterans may have a competitive advantage when bidding on homes with VA assumptions. If a seller transfers their mortgage to a non-veteran, their VA loan privilege for future purchases may be diminished or suspended until the mortgage is paid off. However, a VA-qualified buyer brings their own eligibility to the deal, allowing the seller to retain their VA benefit.
Understanding Assumable Mortgages: An assumable mortgage is one where the buyer takes over the seller’s existing loan, inheriting the same interest rate, payment schedule, and terms. This allows buyers to bypass the typically higher interest rates offered by new mortgages.
Eligibility for Assumption: Not all mortgages can be assumed. Federal agency-backed loans such as VA (Veterans Affairs) or FHA (Federal Housing Administration) mortgages are usually assumable, while conventional mortgages may not be. Lenders and loan servicers must also agree to the assumption.
Credit Requirements and Debt-to-Income Ratio: Buyers wishing to assume a mortgage must meet certain credit requirements and debt-to-income ratios set by VA or FHA. These criteria ensure that buyers have a demonstrated ability to manage the additional financial responsibility of homeownership.
Funds for Closing: Buyers need to come up with funds to cover the difference between the purchase price and the remaining balance on the mortgage. This can be a significant amount, depending on how long the seller has held the mortgage and any changes in property values over time. Lenders may offer second loans at current-market rates to help bridge this gap.
Veteran Advantage: Veterans have an advantage when bidding on homes with VA assumption opportunities. If the seller transfers their mortgage to a non-veteran, the seller’s VA loan privilege for future purchases could be reduced or suspended until the assuming party pays down the mortgage. In contrast, a VA-qualified buyer brings their own eligibility to the transaction, allowing the seller to retain their VA benefit.
Impact on Seller: Assuming a mortgage often results in additional work and longer closing times for sellers compared to cash bids. This is because loan servicers must approve the assumption and may require extra paperwork or negotiations. Additionally, sellers may need to make adjustments to their financing plans as they prepare for the sale of their home.
Loan Servicer Resistance: Loan servicers are often reluctant to facilitate mortgage assumptions due to the significant costs involved, which may not be fully covered by the fees charged. As a result, some servicers may discourage or delay the assumption process.
Roam and Assumption Services: Companies like Roam offer online search features and fee-based services to help buyers navigate the assumption process. These services can assist with finding assumable loan opportunities, guiding buyers through the necessary steps, and providing support during negotiations and closings.
Despite these benefits, assumptions generally require more effort and result in slower closings for sellers compared to cash offers. Loan servicers are often reluctant to process assumptions due to the costs involved. Ted Tozer of the Urban Institute’s Housing Finance Policy Center noted, “Servicers have been very reluctant to do them. They are actually losing money on each one that they do because they have substantial costs that are not covered by the fee they can charge.”
