Mortgage Assumption

In my view, the real estate market is in an interesting pickle. Mortgage rates are near 20-year highs and home prices haven’t slumped sufficiently to offset the increase in interest rates. The result is that people who would normally consider moving are either unable or unwilling to do so. Especially if they locked in rates sub-3% and now may face paying more than 6%. To demonstrate that point, the payment difference between 3% and 6% on a $350,000 mortgage is over $500 per month. To make those 3% and 6% mortgage payments equal, you’d need to drop the home price by roughly $100k, which comes out to about 520 fewer square feet (according to 2022 national averages).  

What’s to be done about this situation? If you have a 3% mortgage, are you unable to move until rates and/or prices become more affordable? If you are on a fixed income, are you unable to purchase a new home until rates decline? Not necessarily, thanks to something called mortgage assumption. 

What is an assumable mortgage? 

Assuming a mortgage is just what it sounds like. The new purchaser of a given home, with lender approval, assumes the mortgage of the seller. So, if a seller currently has a 3% loan, a buyer could potentially assume the loan and takeover payments at 3% when they purchase the house. 

Unfortunately, assumable mortgages in the US are mostly limited to federally insured loans (FHA, VA, USDA), but you don’t necessarily need to meet the same qualifications to assume a loan as the initial borrower (e.g. non-veterans can assume VA loans). The qualification process is generally related to your finances rather than veteran’s status, etc.  

If you’re about to click away because you’re concerned about scarcity of assumable mortgages, know that’s hardly the case. 32.8% of new mortgages in 2020 and 29.3% in 2021 were federally guaranteed.  

Benefits 

Sellers: If you have one of these mortgages and rates are higher than you when you purchased or refinanced, you’re in luck, because not only does your home have value, but the mortgage itself does too. In addition to the negotiating power of having an assumable loan, you can use this spreadsheet to calculate the Net Present Value of your assumable mortgage.  

Buyers: It’s worth running the numbers to see if a larger downpayment and a smaller monthly payment is better for you than getting a new loan at a higher rate. Which brings us to the drawbacks. 

Drawbacks 

When a mortgage is assumed, the buyer steps into the old loan, but they must come up with the cash to pay off the difference in the purchase price and the mortgage balance. This could necessitate either a large downpayment or a second mortgage. Additionally, you’ll need to be approved by the mortgage lender, and you may have some additional hurdles to clear based on the loan guarantor. 

Other notable issues 

For veterans using VA loans, your total VA Loan benefit is limited to $766,550 in most zip codes. Consequently, if a non-VA loan eligible person assumes your VA mortgage, the remaining balance on your old mortgage counts against your total benefit remaining. If, on the other hand, the buyer is entitled to VA benefits, your benefits reset, and you’ll have your full entitlement available.  

Who Could Benefit from Mortgage Assumption? 

1. If you’ve sold or are selling a home and are willing to use the proceeds as a downpayment on your new home. The tax-advantaged profits could pay off the difference between the purchase price and existing balance on an assumable mortgage. 

2. If you’re on a fixed income and it makes more financial sense for you to pay a larger lump sum up front in exchange for a smaller monthly payment. 

3. You have a home with an assumable mortgage at a lower than market rate and you’d like to negotiate for a higher selling price.   

In short, if you’re looking to buy or sell a home, knowing if there is a lower-rate assumable mortgage could provide you with a significant benefit.