Assumable Mortgages
Could You Really Take Over Someone Else's 3% Mortgage? Yes, it is possible.
Imagine buying a home today and discovering the seller has a mortgage with an interest rate around 3%. Your first thought might be: "Can I just have theirs?"
Surprisingly, sometimes the answer is yes. It's called an assumable mortgage, and higher interest rates have made these loans much more interesting to homebuyers.
What Is an Assumable Mortgage?
An assumable mortgage allows a qualified buyer to take over the seller's existing mortgage, including its remaining balance, interest rate, and repayment terms.
So if a seller obtained a low-rate mortgage several years ago, the buyer may be able to assume that loan rather than getting an entirely new mortgage at current rates. And suddenly that boring little phrase "assumable loan" becomes considerably more interesting.
Which Mortgages Are Assumable?
Generally, government-backed mortgages such as:
FHA loans
VA loans
USDA loans
may be assumable under certain conditions. Most conventional mortgages are not.
And no, unfortunately you can't simply find someone with a 2.75% mortgage and ask them to hand it over with the garage-door opener.
The Buyer Still Has to Qualify
Assuming a mortgage doesn't mean skipping underwriting. The new borrower generally must qualify for the existing loan based on applicable income, credit, and other requirements.
The lender or loan servicer also has to approve the assumption. So there's still paperwork. This is a mortgage, after all. We weren't going to get through an entire transaction without paperwork.
The Biggest Challenge: The Equity Gap
This is where assumable mortgages get interesting.
Suppose you're purchasing a home for $500,000. The seller owes only $300,000 on their assumable mortgage.
You may be able to assume the $300,000 mortgage—but there's still a $200,000 difference between the loan balance and purchase price. That difference has to come from somewhere, and the current lender is not going to raise the loan amount to cover it for you. You will need to bring those funds to closing one way or another.
It could potentially be covered through:
Your down payment
Other available funds (gifts, secured loans, etc)
Secondary financing, if permitted and available
For many buyers, this equity gap is the biggest obstacle.
Why Assumable Mortgages Can Be Powerful
If the existing mortgage has a substantially lower rate than current financing, the monthly savings can potentially be significant. That's especially true when the remaining loan balance represents a large portion of the purchase price.
For sellers, an assumable low-rate mortgage can also become a powerful marketing feature.
A remodeled kitchen is nice. A 3% mortgage might get my attention faster.
What About VA Loans?
VA assumptions deserve special attention because there can be implications involving the seller's VA loan entitlement.
The buyer does not necessarily have to be a veteran to assume certain VA loans, but whether the seller's entitlement is restored can depend on the circumstances. That's something both parties should understand before moving forward.
Are Assumable Mortgages Always Better?
No.
You have to compare:
Existing loan balance
Existing interest rate
Remaining loan term
Equity gap
Assumption fees
Available secondary financing
Traditional mortgage alternatives
Sometimes the low rate creates a fantastic opportunity. Other times, the amount of cash required to bridge the equity gap makes traditional financing more practical.
One more important note, as this has hopefully been helpful to you, but my next sentence will help me avoid a barrage of requests for helping with assumptions.
I cannot help you with an assumable loan. No traditional loan officer like me can. You will need to apply through the seller's loan servicer.
Key Takeaway
Assumable mortgages aren't some secret mortgage loophole. But in the right situation, they can be incredibly valuable.
If you're looking at a home with an existing FHA, VA, or USDA mortgage, it's worth asking:
"Is the existing mortgage assumable?"
Because occasionally, you're not just buying the seller's house. You may also have an opportunity to acquire something that's become almost as desirable:
Their interest rate.
-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage