Buyers are Assuming Mortgages to Beat High Rates
To begin with, what are assumable mortgages? When you assume a mortgage, the original borrower signs the balance of their loan over to you, and you become responsible for the remaining payments. That means the mortgage will have the same terms the previous homeowner had, including the same interest rate and monthly payments.
However, most conventional mortgages aren’t assumable. But typically, government-backed loans are. That includes mortgages insured by the FHA or backed by the VA, as well as the United States Department of Agriculture.
But there are downsides. Firstly, the downpayment needs to be higher than government loans. The typical assumable mortgages require a downpayment of 15%. Secondly, there are stricter credit requirements to assume a mortgage. And remember, you may need to take out a second mortgage if you don’t have the cash for the remaining balance. And that second loan will be at today’s high rate. Put simply, the buyer has to pay the seller the difference between the original mortgage balance and the current agreed to price.
On the positive side, the fees are typically lower than for new loans, and no appraisal is needed. The buyer must undergo the application and underwriting process to qualify, just as they would in any new mortgage.
In a paper published by the Urban Institute in October, Ted Tozer, the former head of Ginnie Mae, argued that “Government changes to assumable loans could benefit the market. Assumable mortgages enable the value of the mortgage savings to be partially capitalized into the home’s sales price, allowing the owner-occupant to outbid even a cash investor. It also helps home sellers to receive top dollar for the home.”
Mortgage servicers, lenders, and other companies are working to make assumable mortgages more accessible. But it will take a concerted effort from the government to update some policies.
“One of the things that’s not going to be huge – but every incremental gain matters – are assumptions. They are going to become more important,” David Sheeler, president of residential servicing and executive vice president of correspondent lending at Freedom Mortgage said during a mortgage conference last November in New York City.
According to Sheeler, “One of the keys to making assumptions become more impactful is building a market for second mortgages which will help both existing homeowners and new homeowners realize the benefits of the lower rates on current mortgages.”
An estimated one-third of all mortgages in the U.S. are assumable now. Because many owners will hold onto the low rates they have as long as possible, assumable mortgage listings represent only a fraction of homes currently for sale, making them one of the best-kept secrets for homebuyers these days.
A website for those looking for assumable mortgages is the Assumable.io website. The site lets you search for listings city by city, including detailed mortgage data such as the assumable rate and payment compared with the payment at current rates.
Chris Birk – vice president of Veterans United Home Loans, which has a national network of agents who specialize in working with military buyers – said there's been a 600% increase in the number of VA mortgage assumptions from 2022 to 2023.
"We're seeing a marked increase in interest in these," he said. "But it's a foreign concept for so many buyers and sellers."