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With interest rates significantly higher today, assumable mortgages offer buyers the chance to take over loans with lower interest rates, providing an edge in a competitive market. However, not all mortgages are assumable, and understanding the process is crucial for success.
- What Is an Assumable Mortgage?
An assumable mortgage allows the buyer to take over the seller’s existing mortgage, retaining the current terms such as interest rate and remaining balance. This is particularly attractive when rates have risen, as buyers can lock in a lower rate.
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- How to Find Out if a Mortgage Is Assumable
Not all mortgages are assumable. To check if a mortgage is assumable:
- Review the mortgage documents, especially the Closing Disclosure (CD).
- Contact the lender for confirmation.
- FHA, VA, and USDA loans are generally assumable with lender approval. Conventional loans usually have a due-on-sale clause, which prevents assumption unless the lender waives it.
- Types of Assumable Mortgages
- FHA Loans: Generally assumable with lender approval if the buyer qualifies.
- VA Loans: Assumable by veterans and non-veterans, but veterans need a Substitution of Entitlement to free up their VA loan benefits.
- USDA Loans: Assumable with specific qualifications.
- Conventional Loans: These are usually not assumable due to due-on-sale clauses unless the lender makes an exception.
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- Percentage of Assumable Mortgages
Approximately 20% of U.S. mortgages are assumable, primarily FHA, VA, and USDA loans. With around 50 million active mortgages in the U.S., this means roughly 10 million mortgages could be assumable.
- Benefits of Assumable Mortgages
Assuming a mortgage can lock in rates as low as 2.75% to 3.5% from 2020-2021, compared to today’s 6.75% rates. This can lead to significant monthly savings for buyers, making homes more affordable despite rising prices.
Example: For a $500,000 purchase with 20% down:
- Standard Mortgage (6.75%): Monthly payment = $2,594.39
- Assumable Mortgage (2.75%): Monthly payment = $1,632.96
Savings: Assumable mortgages could save buyers $961.43 monthly, or over $11,500 annually.
- The Process to Assume a Mortgage
- Verify Assumability: Confirm with the lender or review mortgage documents.
- Apply: Submit an application similar to a loan application, including income and credit details.
- Lender Approval: The lender evaluates the buyer’s qualifications.
- Assumption Agreement: The mortgage is legally transferred via an agreement.
- Closing: Finalize the transaction, including covering assumption fees and any differences between the sale price and loan balance.
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- Seller Liability
For VA loans, sellers may remain liable unless they secure a Substitution of Entitlement. Sellers must request a Release of Liability to avoid remaining responsible for the loan after the buyer assumes it.
- Can MLS Listings Include Assumable Mortgages?
Some MLS platforms allow real estate agents to list properties with assumable mortgages. Agents can search MLS databases using filters including FHA, VA, and USDA loans, the most common assumable mortgages. Other platforms, such as AssumeList and Assumable.io, specialize in listings with assumable mortgages. This feature is becoming more widely available as assumable mortgages gain popularity in high-rate environments
National Association of REALTORS®
- Lower Fees Compared to New Loans
Assuming a mortgage typically incurs lower fees compared to taking out a new loan. Since it’s not a new loan origination, buyers can avoid many upfront costs, such as loan origination fees and appraisals. There are still assumption fees, usually ranging from $500 to $1,000, but this is often much lower than traditional closing costs
- Fewer Years of Mortgage Payments
By assuming a mortgage, buyers take over an existing loan that’s already been paid down for several years. This means fewer years of payments, which can lead to additional savings. For example, assuming a loan that is five years into a 30-year term means the buyer has only 25 years of payments left instead of starting a new 30-year term
National Association of REALTORS®
Conclusion: Real estate professionals can unlock significant value for their clients by understanding the assumable mortgage process, especially in today’s high-interest-rate environment. Assumable mortgages offer buyers a rare opportunity to secure lower rates, making this an essential tool in your arsenal.
This is a critical point in demonstrating your VALUE to your buyer clients.
