Assumable mortgages are a little-known workaround that allows homebuyers to take over a seller’s existing mortgage, keeping the same terms, including the lower mortgage rate. This type of loan is seen as a potential way to help revive the struggling housing market. About 23% of all US mortgages are assumable, totaling around 12.2 million loans. However, the process of assuming an existing mortgage can have drawbacks, such as a longer approval process and potentially needing to compensate the seller for transferring the value.
Ellen Harper, a software analyst, recently closed on a home in Georgia with a 2.49% mortgage rate through an assumable mortgage. This low rate will save her thousands of dollars in monthly payments compared to current mortgage rates. While not all home loans can be passed to a new buyer, most government-backed loans, like those from the FHA and VA, are assumable. The number of FHA and VA-backed loans assumed has seen significant growth in recent years.
Assuming an existing mortgage involves making a cash payment to the seller to compensate for their equity stake in the home. Some buyers take out a second mortgage to cover this payment, potentially resulting in a lower total monthly payment if the assumed mortgage rate is low enough. Getting approval for an assumable loan requires meeting specific credit and income standards set by the lender and the government agency backing the loan. Delays in approval are common due to restrictions on lender profits from processing applications.
While assumable mortgages can offer significant advantages, there are potential downsides for both sellers and buyers. Lenders may delay approving assumptions due to limits on their profits, leading to frustration among parties involved in the transaction. For sellers with VA-guaranteed loans, passing their mortgage to a civilian buyer may affect their ability to get another VA loan. Despite challenges, assumable mortgages may appeal to homebuyers looking for lower interest rates in a high-rate environment. Educating sellers about the process is crucial, as there can be misconceptions about the responsibilities of the seller after the assumption is made.
Real estate start-ups like Roam are assisting buyers in finding homes with assumable mortgages. These companies help educate sellers and buyers on the process and benefits of assumable loans. While assumable mortgages are relatively rare in the market, the potential savings and benefits for buyers and sellers make them an attractive option for those looking to secure lower mortgage rates. As the housing market continues to face challenges, assumable mortgages could be a valuable tool for those seeking affordable home financing.
