I’m a seasoned real estate veteran with over 20 years of experience and a Chartered Financial Analyst (CFA). Throughout my career, I’ve always found assumable mortgages intriguing, yet there was seldom a compelling reason to seek them out.
Now, the tide has turned. After enjoying historically low rates for several years, we’re witnessing a sharp rise back to more reasonable levels.
Current mortgage rates are hovering in the 7-8% range, but there’s a sizable group of homeowners who secured their loans when rates were as low as 2-3%.
Many of them are now looking to sell, presenting potential buyers with an attractive proposition.
Now is the time to explore assumable mortgages as an opportunity.
In this guide, we’ll explore how you could benefit from these unique circumstances in the real estate market.
Table of Contents
Part 1: Understanding Assumable Mortgages
What is an Assumable Mortgage?
An assumable mortgage is a home loan that can be transferred from the current owner (the seller) to the buyer. Instead of obtaining a new mortgage, the buyer steps into the seller’s shoes and continues paying off the existing mortgage balance with the same interest rate and remaining loan term.
This concept might seem straightforward, but it has profound implications for the buyer, the seller, and the dynamics of the real estate transaction.
One key aspect of assumable mortgages is their potential to save the buyer money. If the seller’s mortgage has a lower interest rate than what’s currently available on the market, the buyer could save thousands, if not tens of thousands of dollars over the life of the loan.
Why Assumable Mortgages are Attractive to Homebuyers
Assumable mortgages can offer numerous advantages for buyers. So what are the benefits of an assumable mortgage?
- Lower Interest Rates: One of the primary benefits of an assumable mortgage is the potential for lower interest rates. If the seller secured a low rate and current rates are higher, the buyer stands to save significantly on interest payments. This cost savings can make homeownership more affordable and potentially allow the buyer to afford a more expensive home.
- Reduced Closing Costs: With an assumable mortgage, the buyer is essentially stepping into the seller’s loan. As such, many of the closing costs associated with initiating a new mortgage may not apply, potentially saving the buyer thousands of dollars. These can include loan origination fees, appraisal fees, title search fees, and more.
- Faster Closing Process: Bypassing the need for a new mortgage can streamline the home buying process. The buyer won’t have to navigate the often complex and time-consuming process of applying for a new mortgage, which can speed up the transaction and reduce stress.
- Potential for Lower Down Payment: Depending on the terms of the existing loan and the agreed-upon purchase price, the buyer might be able to put down less money upfront compared to a traditional mortgage.
There is even the potential for an assumable mortgage with no down payment.
Types of Assumable Mortgages
While not all mortgages are assumable, certain types commonly are:
- Federal Housing Administration (FHA) loans: These government-insured loans are assumable, whether they’re adjustable-rate or fixed-rate mortgages. This means a buyer could take over an FHA loan from a seller under the same terms the seller had initially negotiated.
- U.S. Department of Veterans Affairs (VA) loans: Like FHA loans, VA loans are also insured by the federal government and are assumable. However, depending on the terms of the loan, the person assuming the loan may need to be an eligible veteran.
- Certain Adjustable-Rate Mortgages (ARMs): Some ARMs are assumable, but it’s less common. These loans have interest rates that can change over time, so potential buyers should carefully consider the risks.
Part 2: Finding and Assuming an Assumable Mortgage
How to Find Assumable Mortgages
To find an assumable mortgage, individuals can start by contacting local lenders or mortgage brokers to inquire about available assumable loans.
They can also search online platforms specializing in assumable mortgages. It is essential to carefully review the terms and conditions of the loan and ensure all necessary paperwork is completed before finalizing the assumption process.
Finding assumable mortgages requires a proactive approach and some detective work. Here are several strategies:
- Real Estate Listings: Start by checking online real estate listings. Websites like Zillow, Realtor.com, and Trulia allow sellers to list details about their property, including whether their mortgage is assumable. While this feature isn’t always used, it’s worth looking for.
- Real Estate Agents: Real estate agents can be an invaluable resource in the search for assumable mortgages. They have access to comprehensive databases of property listings, some of which may not be publicly available. A knowledgeable agent can help identify properties with assumable mortgages and guide you through the process.
- Networking: Building relationships with real estate professionals can lead to opportunities. Mortgage brokers, real estate attorneys, and others in the industry may be aware of assumable mortgages that aren’t widely advertised.
- Local Banks and Credit Unions: Some financial institutions may have information on assumable mortgages within their portfolios. It’s worth reaching out to banks and credit unions in your area to inquire.
- Public Records: Mortgages are a matter of public record, so you can go to your local county courthouse or its website to search for them. This can be time-consuming, but if you’re dedicated, you might find some opportunities.
- Direct Outreach: If there’s a particular neighborhood or type of property you’re interested in, consider reaching out to homeowners directly. They might not have considered selling or didn’t know their mortgage was assumable until you asked.
The Process of Assuming a Mortgage
The assumable mortgage process allows a new buyer to take over an existing mortgage loan. This can be beneficial as it may offer lower interest rates and fees compared to obtaining a new mortgage.
To assume a mortgage, the buyer must meet the lender’s requirements and complete the necessary paperwork to transfer the loan.
Assuming a mortgage involves several steps:
- Identify a Suitable Property: Start by finding a property with an assumable mortgage that meets your needs and budget.
- Check Eligibility: Once you’ve identified a property, contact the current lender to verify that the mortgage is assumable and find out what qualifications you need to meet.
- Apply for the Assumption: If you meet the qualifications, you’ll submit an application to the lender. The approval process typically involves a credit check and income verification.
- Get Approved: The lender will review your application and decide whether to approve you for the loan assumption.
- Secure Mortgage Insurance (if required): If the mortgage requires insurance, such as FHA and VA loans, you’ll need to arrange for this.
- Close on the Property: Once all conditions are met, you can move forward with the closing. This involves signing legal documents that transfer ownership of the property and the mortgage to you.
Equity, Down Payment, and Amortization Schedule
When you assume a mortgage, it’s important to understand that you’re also assuming the seller’s loan repayment plan, or amortization schedule. However, you’re not taking on the seller’s equity in the property.
Equity is the portion of the property the seller has already paid off. The buyer typically needs to pay the seller for their equity in the property.
This can be done through a lump sum payment at closing or by rolling it into the loan amount, depending on the terms agreed upon with the seller.
The down payment for an assumable mortgage can vary. It might be based on the remaining loan balance, the home’s appraised value, or a percentage of the agreed-upon purchase price.
It’s crucial to discuss these details with the lender and the seller to understand what’s expected.
Part 3: Risks and Mitigation Strategies
Assuming a mortgage isn’t without risks:
- Interest Rate Risk: If the assumable mortgage is an adjustable-rate mortgage, the interest rate could increase in the future, leading to higher payments.
- Market Risk: Real estate market conditions can change, potentially affecting the property’s value.
- Lender Approval Risk: The lender must approve the assumption, which isn’t guaranteed.
To mitigate these risks:
- Conduct Thorough Research: Make sure you fully understand the mortgage’s terms and conditions before assuming it.
- Secure a Fixed-Rate Assumable Mortgage: If possible, opt for a fixed-rate assumable mortgage to avoid the risk of rising interest rates.
- Maintain Good Credit: A strong credit score can increase your chances of lender approval.
Part 4: The Challenge of Finding Assumable Mortgages: Insights for Buyers
Why Mortgage Brokers May Not Promote Assumable Mortgages
Mortgage brokers play a pivotal role in the home buying process, guiding buyers through the complexities of securing a loan. However, they may not always be motivated to help clients find assumable mortgages. Here are a few reasons why:
- Less Profit: Mortgage brokers earn their income through commissions, which are often calculated as a percentage of the loan amount. With assumable mortgages, the loan amount is typically lower than a new mortgage because the buyer is taking over an existing balance. This means less commission for the broker, providing less financial incentive to promote these types of loans.
- Limited Availability: Not all mortgages are assumable. Currently, only certain types of government-backed loans, including FHA, VA, and USDA loans, qualify as assumable. Conventional or jumbo loans typically have “due on sale” clauses, which require the loan to be paid off when the property is sold. This limited availability makes it harder for brokers to find and match clients with suitable assumable mortgages.
- Increased Complexity: Assumable mortgages can add complexity to a real estate transaction. The buyer must not only negotiate with the seller but also get approval from the lender to assume the loan. This process can be more time-consuming and complex than applying for a new mortgage, which might deter some brokers.
The Difficulty of Finding Assumable Mortgages
Finding an assumable mortgage can be challenging for several reasons:
- Low Awareness: Many homeowners might not be aware that their mortgage is assumable. Even if they do know, they might not advertise this fact when selling their home. This lack of awareness can make it harder for prospective buyers to find these opportunities.
- Fewer Options: As mentioned earlier, only certain types of government-backed loans are assumable. This significantly narrows down the pool of available properties with assumable mortgages.
- Lender Restrictions: Even when a mortgage is theoretically assumable, the lender has to approve the buyer. Lenders might be stringent about their approval criteria, making it harder for buyers to qualify.
- Risk to Sellers: There can also be risks to sellers with an FHA assumable mortgage. If the buyer defaults on the loan, the seller could potentially be held liable. This risk might deter some sellers from considering this option.
What Percent of Mortgages are Assumable?
The exact percentage of assumable mortgages on the market at any given time can vary based on factors such as the prevalence of government-backed loans and market conditions.
Given that assumable mortgages are mainly limited to FHA, VA, and USDA loans, they represent a smaller portion of the overall mortgage market.
As per the Mortgage Bankers Association, as of the second quarter of 2021, FHA and VA loans together constituted about 22% of all outstanding mortgages in the U.S.
However, not all of these would be available or suitable for assumption, making the actual percentage of assumable mortgages smaller.
While assumable mortgages can offer significant advantages to homebuyers, finding them can be a challenge due to several market dynamics. Buyers interested in this route may need to be proactive, flexible, and patient in their search.
Part 5: Historical Demand and Current Role of Assumable Mortgages
The demand for assumable mortgages has fluctuated over time. During the late 1970s and early 1980s, assumable mortgages were highly sought after during the high-interest-rate environment.
Today, with interest rates rising from historical lows, assumable mortgages could become more popular again.
Part 6: Carleton Sheets and The No Money Down Real Estate Program
Carleton Sheets is a well-known figure in the real estate industry, famous for his program on buying real estate with no money down.
As a teenager in the 1990s, I first learned about assumable mortgages through Carleton Sheets program.
Carleton Sheets coached that an assumable mortgage no down payment is a unique type of home financing option that can provide significant benefits for prospective buyers.
It’s a great tool for those who want to own a home but may not have the funds for an initial down payment.
With an assumable mortgage no down payment, buyers can step into the shoes of the original borrower. They assume the same interest rate, repayment period, and loan balance of the current mortgage.
Although Sheets faced legal battles over alleged deceptive marketing practices, his strategies on assumable mortgages and other real estate investment tactics continue to influence the industry.
Part 7: Selling a Home with an Assumable Mortgage
Selling a home with an assumable mortgage allows the buyer to take over the existing mortgage terms, providing potential benefits such as lower interest rates.
However, the buyer must meet the lender’s qualifications and pay any necessary fees. It’s important for both parties to consult with professionals to ensure a smooth transaction.
Selling a home with an assumable mortgage can be an attractive option for many homeowners. This unique selling point can make your property stand out in a competitive market and potentially attract more interested buyers.
The main advantage of selling a home with an assumable mortgage is that it can offer significant savings to the buyer.
If the interest rate on your existing mortgage is lower than current market rates, assuming your mortgage could be a great deal for a potential buyer. This means you could also potentially sell your home at a premium. There is value in the lower interest rate.
They would essentially be getting a ‘discounted’ loan, which makes selling a home with an assumable mortgage very appealing.
Selling a home with an assumable mortgage also has its challenges. Not all buyers will qualify to assume your mortgage, as lenders will typically require them to meet certain credit and income qualifications.
Therefore, it might limit the pool of potential buyers.
In Conclusion, Assumable Mortgages Are Worth It
Assumable mortgages offer an alternative path to homeownership that can provide significant benefits. However, they require careful consideration, thorough understanding, and diligent research before proceeding.
This guide covers the basics, but every situation is unique, so it’s important to consult with a real estate professional or financial advisor to determine if an assumable mortgage is right for you.