With interest rates up and homeowners feeling locked into lower-rate mortgages, it’s time for real estate agents to educate themselves on how loan assumption works.
Agents and brokers: How many of you know what an assumable loan is? Do you know how they work and when a client and/or a loan might be eligible?
If you don’t know much about loan assumption, don’t feel bad. For the past few years, there wasn’t much reason for us to know. Remember those heady days of three-percent rates? Remember January 2021, when the average 30-year fixed rate hit a historic low of 2.65%? Home sales were on fire. Our phones were too hot to touch.
Then came the 2022 rate hikes and a steady climb into the sevens by late 2023.
Everyone reading this knows exactly where we stand now. (If not, keep track at Mortgage News Daily.) And even if you don’t know exactly what the 30-year fixed rate is at the moment, or what the current difference between the 30-year, the 15-year, or an initial ARM rate is, you do know this: the phones have gotten uncomfortably quiet. Plenty of potential clients who might have considered upgrading or relocating are feeling locked into their three-percent mortgages and staying put for now.
That’s where assumable mortgages come in: They allow a buyer to take over a seller’s mortgage instead of applying for a new home loan, which means a buyer gets the old interest rate.
If you’re old enough to remember “Cheers” and “The Love Boat,” you were around when assumable mortgages were popular. Interest rates in the early 1980s made today’s rates look like no big deal: the 30-year fixed rate peaked at more than 18% in 1981. Astonishing, when you think about it.
Although we’re nowhere near that 18% high-water mark, maybe it’s time for assumable loans to make at least a partial comeback.
There are, however, some caveats. First of all, most sellers have no idea that they can even offer their mortgages as part of the sales package, so buyers may have no idea how to find potential sellers whose mortgages are assumable.
A second issue is that buyers who apply have to qualify for the original loans. And even trickier than that: not all loans are assumable. Only government-backed mortgages are eligible (i.e., loans backed by FHA, VA, or USDA).
Thirdly, there’s this: to assume a mortgage, buyers have to cough up a downpayment to cover the difference between the sales price and whatever balance is left on the mortgage. That could be a big enough number to kill the deal for a lot of buyers. For example, if the seller has a $400,000 mortgage and the sales price is $600,000, the buyer has to pay $200,000 down — which means they may need to take out a second loan to cover the downpayment, most likely at the higher rate they were trying to avoid.
The benefits to the buyer are obvious: they get a lower interest rate, likely lower closing costs (since you’re not originating a new loan), and potentially, a shorter loan life, if the seller is several years into the loan period.
For buyers, offering an assumable mortgage can help them close faster by making the transaction more appealing to buyers.
One other downside is that it can take longer to close these deals, Lenders don’t really like them because they can’t charge as much, explained former mortgage banker Ted Tozier. “They’re required to do them,” he told Marketplace for a 2024 story, “but they’re probably not going to get high priority.”
They may still be rare, but assumable mortgages can nudge some transactions into the affordability zone for certain buyers who qualify. Educate yourself about how these loans work. If you’re representing sellers, find out whether their mortgages might qualify. And if you’re a buyer’s rep, talk to the seller’s agent about whether the client they’re working with might have an assumable mortgage.
You can set yourself apart and provide an excellent extra service by becoming knowledgable about assumable loans and seeking them out for your clients.
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