Ways Buyers are getting below market interest rates, Part 3 of 3: Assumable Mortgages

To wrap up this series, the third way buyers are able to get below-market interest rates is by finding homes for sale that have an assumable mortgage.

Right now there are 105 homes listed on our MLS promoting an assumable rate. And that’s just for the sellers who even know it’s a possibility. There are plenty who don’t know.

I’m actually in the process of selling my home right now and I called my mortgage company to see if my loan is assumable. The first person on the call said it was and transferred me to the division that handles the assumption process. After doing a little more digging into the type of loan I have, it turns out my loan is only assumable by a family member. So that’s unfortunately not going to help me in the sale of my home. 

By the way, I had to wait on hold for over an hour to find out my mortgage wasn’t openly assumable. I asked about the wait time and they said they have been inundated with calls on assumable mortgages lately. 

Let’s start with the basics.

What is an assumable mortgage?

An assumable mortgage is an existing mortgage that can be taken over by a buyer who then becomes responsible for the remaining payments. So if you’re looking to buy a house where the seller has a 3.5% interest rate that’s assumable, you could take over that existing mortgage and maintain that payment as-is. Not a bad deal, right? Well, there’s a little more to it. Keep tracking with me.

So the next question - Can you assume a mortgage?

That depends if the seller’s current lender will allow it. The original loan structure has to allow for it and that’s something the seller can find out by contacting the mortgage lender or by looking at their loan documents. This is something only the seller can find out. A mortgage company won’t release this information to anyone who isn’t the mortgagor.

What mortgages are not assumable?

Mortgages that have a due-on-sale clause are not assumable. Conventional loans are not assumable although some exceptions can be made for the instance of transferring the mortgage to a family member.

What mortgages are assumable?

FHA loans, VA loans and USDA loans are typically assumable.

How do I know if my loan is an assumable loan?

You’ll have to contact your lender to find out or read your loan documents. And if you’ve ever tried to read your loan documents… well, you just might want to go ahead and call your lender to find out.

Even if you do have a mortgage that is assumable, you have to be up-to-date on your payments and in good standing with your mortgage company for them to allow another buyer to assume the mortgage.

How does an assumable mortgage work?

So, hurrah! The seller finds out the loan is assumable and they’re up-to-date on their mortgage payments. Then the buyer must get approved through the original lender.

That means going through the entire approval process where the lender will review the buyer’s credit score, credit history, income, and debt-to-income ratio. The new buyer will have to get completely underwritten by the new lender to be able to take over the loan.

But here’s a big catch in this whole assumption scenario, it’s quite likely there’s a gap between what the seller owes on the mortgage and what the seller is currently selling the house for.

Let’s say the seller owes $200,000 on the mortgage but is selling the home for $300,000. Well, somehow that $100,000 gap needs to be paid by the buyer. That can be in the form of cash or it can be in the form of a second mortgage on the home. 

And this is where it can start to get a little hairy. If you’re now putting a second mortgage on the home, that could affect the buyer’s debt-to-income ratio and now make it so that they no longer qualify for the assumption.

And that new loan you’re getting, well that’s going to be at today’s interest rate, not the interest rate you’re assuming. So while it’s better to pay the higher interest rate on a smaller portion of money, it’s still something to factor into your costs.

How long does it take to assume a loan?

Timing varies based on loan type and the lender’s capacity to take it on, but most estimates suggest preparing yourself for the assumption process to take 60-120 days. Yes. That’s two to four months. So this is not for someone who needs to move quickly. 

How much does it cost to assume a loan?

The cost will vary by lender and you should ask this question at the start so there are no surprises down the road. There will be a loan assumption fee and that generally ranges from .5% to 1% of the loan amount.

If you have to take out a second loan to cover the gap from the existing mortgage to the actual sales price of the home, then you will likely have additional fees and closing costs associated with that loan. So be sure to ask for all of these expenses at the beginning of the process so you go in well aware of what your financial outlay will be.

As you can see, it’s not impossible right now to buy a home. To win in this market, you have to think outside the box.

And if you’re hearing all of this and feel it’s a little much and that you’ll just wait for rates to go down or for the pricing of houses to go back down, that may not be the best option.

We have so much pent-up buyer demand that has been going on for years now. During the market runup during Covid, buyers started to sit it out because they didn’t want to compete with all the multiple offers and they grew weary after making so many offers and losing. 

Then the group of sidelined buyers grew bigger when interest rates started increasing. They started saying, “When interest rates get back in the 5’s, I’ll jump back into the market then.”

But they never went back in the fives. They went into the sevens and then more people said, “nah. I’ll wait until rates go back into the sixes.”

But they haven’t gone back into the sixes. So the group of sidelined buyers has only gotten bigger.

So one theory of what will eventually happen is this now enormous group of sidelined buyers will start to just accept current rates as the new normal and will start to slowly creep back into the market and the size of that sidelined group will slowly recede.

The second theory is that if rates go down, you’ll have a bunch that will jump in and crowd the market. That will push us back to the uber competitive buyer market we just came out of where prices went up and you had to offer a lot over the asking price to win the bidding war.

Or, you could forget playing the game of trying to perfectly time the market and you could operate in a much more calm purchase environment as a buyer where you have the leverage, use one of these three methods to get a house today at a below-market interest rate, and lock in the price of the house while getting the peace of mind of having a home now at today’s price.