Would-be homebuyers are getting increasingly savvy when it comes to buying a house as mortgage rates continue to hover around 7%.
One way is through home loan assumption—which means the buyer takes over the house’s original mortgage (and interest rate) upon purchase. But, the loan can be assumable only when it’s backed by the U.S. government—like FHA, VA, and USDA loans.
More than 11 million homeowners in America have assumable loans, according to the U.S. News & World Report. And over the past 10 years, nationally, 17.1% of mortgages were FHA loans and 7.7% were VA loans, adding up to roughly 25% of mortgages that are, in theory, assumable, according to Realtor.com® data. This number does not include USDA loans.
The states with the highest share of assumable mortgages are Alaska (39.3%), Wyoming (34.4%), Virginia (34.1%), Nevada (32.8%), Oklahoma (32.5%), Maryland (32.1%), Georgia (31.5%), Louisiana (31.5%), New Mexico (31.4%), and Delaware (30.8%).
“An assumable mortgage may be especially appealing to buyers as these loans effectively pass a homeowner’s current low-rate mortgage to the buyer,” says Hannah Jones, Realtor.com senior analyst.
Jones adds that roughly 85% of outstanding mortgages have a rate below 6%—well below today’s going mortgage rate, which makes assumable loans an appealing prospect. But they are hard to come by.
(Getty Images)
“Conventional loans, which comprise the majority of home loans across the U.S., are not assumable. Government loans (FHA, VA, USDA) are assumable, but make up a much smaller share of the market and are subject to conditions,” she says.
“Additionally, buyers assuming a mortgage still need to come up with the money to pay off the seller’s existing equity, whether with cash or by taking out a second home loan, which would be subject to today’s mortgage rate.”
Additional perk of an assumable loan
Besides the lower interest rate of an assumable mortgage, it can also shorten the life of a home loan.
The seller would have already paid the initial years of the mortgage, so the buyer would need to cover only the remaining years. For instance, if the original buyer was six years into a 30-year mortgage, the new owner who takes on the loan would pay only the 24 years that are left on the loan.
First-time homebuyers Mickey Ricard and Grace Lucchese, both 24, spotted a three-bedroom Colonial in Westford, MA, which was listed for $429,000
The real selling point of the property emerged during negotiations. They had tried to negotiate a lower price with the owner, who suggested that the couple could assume his loan.
Ricard and Lucchese learned that an assumable mortgage would allow them to essentially “take over” the seller’s mortgage—as well as its 2.6% interest rate.
(Grace Lucchese)
Rates at that time hovered at 7.6%, so “our mortgage payment would go from $3,800 to $1,700 per month,” Lucchese told Realtor.com. “It was the deal of the century, a loophole, like winning the lottery.”
Tips for finding an assumable mortgage
Many buyers claim it can be difficult to find a home with an adjustable mortgage. To help, Realtor.com recently added an “assumable loan” search filter so shoppers can find these properties more easily.
It might also pay to focus a search on areas near military bases.
“Many of the areas with a high share of listings mentioning an assumable mortgage are home to or near a military base, and therefore see a larger share of VA loans, which are assumable,” says Jones.
Challenges of getting an assumable mortgage
Assumable mortgages can be hard to get because there’s not a big upside for lenders. On conventional loans, banks rake in hefty closing costs that range from 2% to 7% of a home’s purchase price. On an assumable loan, fees max out at $300 for VA loans and $900 for FHA ones.
Since the majority of lenders aren’t used to dealing with assumable loans, they don’t always know how to do so—especially since the underwriting systems on these loans are manual instead of automated.
Companies like Assume Loans, Roam, and AssumeList help buyers navigate the process.
“We help consumers around the country find and purchase homes with assumable mortgages,” Mike Lorino, founder and CEO of AssumeList, says. “We track interest rate, loan balance, down payment requirement, and even the mortgage payment of every assumable home in a market, even if the listing agent doesn’t include any comments in the listing.”
What to know about an assumable mortgage
Conventional loans are not eligible for assumption; they require the loan be paid in full—and a new one issued—whenever a property is sold or transferred to a new owner.
These are the three types of loans that are assumable:
- FHA loans: These loans are backed by the Federal Housing Administration, which grants loans to low-income borrowers who might not qualify for a conventional loan. Keep in mind that the new borrower, like the old, must qualify under all FHA terms, including credit and employment standards.
- USDA loans: These loans are offered or backed by the U.S. Department of Agriculture to low-income borrowers in rural areas. As above, the new buyer will need to meet the USDA’s credit score and income guidelines.
- VA loans: These loans, offered to active or retired military, can even be assumed by nonveterans.
When to pump the brakes or proceed with caution
Although assumable mortgages are highly sought after, there are a few situations where they just aren’t advisable, including the following:
- When the asking price is way more than the balance of the mortgage you’re assuming. You’ll need to cover the difference, either out of pocket or with a second mortgage (which is harder to qualify for).
- When the seller with an assumable VA loan needs his or her VA benefit. Because the VA benefit stays with the loan instead of the person, it can be challenging for the veteran to get another VA loan when he or she moves.
