"Assumable Mortgages" Gain Traction
Homebuyers are increasingly using "assumable mortgages" to secure interest rates below 3% in the current market, where rates hover near 6%. The strategy involves a buyer taking over the seller's existing low-rate mortgage from the COVID-era. This creative financing product is gaining attention as a way to bypass the current high-rate environment.
- Most assumable mortgages are government-backed, including FHA, VA, and USDA loans; conventional loans typically contain a "due-on-sale" clause that requires the loan to be paid off upon sale, making them ineligible for assumption. - The primary financial challenge for a buyer is covering the seller's equity, which is the difference between the home's sale price and the remaining mortgage balance. This amount must be paid to the seller in cash at closing or financed with a separate, second mortgage at current interest rates. - A buyer cannot automatically take over the loan; they must first be approved by the lender by meeting the credit and income qualifications for that loan program. For instance, to assume an FHA loan, a buyer generally needs a minimum credit score of 620 and a debt-to-income ratio that doesn't exceed 43%. - VA loans can be assumed by non-military buyers, but this can be a disadvantage for the seller. The seller's VA entitlement—the amount the VA guarantees—may remain tied to the property until the loan is fully paid off, preventing them from using it for a future home purchase. - The process involves assumption fees charged by the lender and other closing costs, although these are typically lower than those for a new mortgage. For a VA loan assumption, the buyer must pay a VA funding fee equivalent to 0.5% of the outstanding loan balance. - An appraisal is often not required when assuming a mortgage, which can save the buyer several hundred dollars in closing costs.
