When Carol Addy began in the mortgage industry more than 20 years ago, assumable mortgages were quite well known. Some of them even allowed the buyer to take over someone’s house loan without even getting financially qualified first.
“But that type of program went away,” says Addy, vice president and national sales manager for FirstBank Mortgage Partners in Charleston, S.C., She is also finishing her year-long presidency for the Mortgage Bankers Association of the Carolinas.
Assumable mortgages still exist, but it’s hard to find them anymore, she adds. And the buyer must qualify for the mortgage they are trying to assume.
What is an assumable loan?
Just like the name says, you assume the home loan of the seller’s mortgage rather than getting a new loan. The servicer of the loan will handle getting the potential buyer’s full credit report and their debt-to-income structure and see if they qualify to make the payments now and in the future, Addy says.
Which loans are assumable?
FHA, VA and USDA loans can all be assumable. Conventional loans, such as the ever popular 30-year-loans, are not assumable. However, Addy states there are some non-conforming conventional loans that are assumable such as adjustable rate mortgages (ARMs) from Fannie Mae and Freddie Mac.
How does assumable mortgages work?
Depending on what the sellers negotiate with the buyers, they usually will want some equity from the home’s value that they have acquired while owning the home. “Interest rates are rising. You won’t be able to get a government loan these days for 3.5 percent interest,” Addy says. “So, you can assume someone else’s loan that is that rate. That can save you a lot of money through the years.”
Once the seller and buyer reach an agreement, they contact the loan servicer to handle the logistics to decipher whether the buyer can afford the loan. The closing happens but closing costs can be much less than a traditional closing. FHA, VA and USDA have limits on assumption-related fees.
How would you find an assumable mortgage?
Addy says that homeowners used to advertise assumable mortgage options on their For Sale by Owner ads. Some still do, but now it’s tougher to find. In most cases, you won’t find realtors involved in assumable mortgage sales because it’s not a true, traditional real estate sale. Realtors get an average of 6 percent commission when selling a home, but assumable mortgages have no contract so they wouldn’t be getting that payout. They might be able help their seller to find a buyer for an assumable mortgage.
“But it takes a very savvy homeowner to know how to market it and understand all the aspects of an assumable loan,” she says.
What are the advantages of an assumable mortgage for the buyer and seller?
The buyer gets a much lower interest rate than the current rates, especially with rates rising.
The seller will have reduced fees because they don’t have to pay real estate commission. They can sell their home outright without too much marketing or open houses. Plus an assumable mortgage helps the seller have more negotiating power on price.
What could be the disadvantages for the buyer or seller?
The buyer might need a large down payment because home values have risen in most areas. But if the home’s value has appreciated a lot, the buyer will need money to cover that equity.
Addy says that in her hometown of Charleston, the median home price has grown to $250,000.
“Plus there is a lack of inventory and a lack of affordable housing in a lot of markets around the country. Interest rates that go up a half a point knock out a whole block of borrowers. Assumable mortgages might be able to help a little. But all those 30-year fixed mortgages, which are definitely the most popular out there, aren’t assumable,” she states.
For sellers, It might be tough to find home buyers who have available cash on hand to pay the equity you need from the home. It’s tough enough for some people to come up with a minimum down payment. If you want equity out of your house, the buyers need cash, Addy says.
When is the best time to assume a mortgage?
“If you can find one, it might be a good thing to look into,” she says. “But the hard part will be finding one.”