Every agent in the market today is aware of the pressure created by rising interest rates squeezing the budgets of potential home buyers. Long gone are the days of 2.25%, 3%, or 3.5% interest rates that fueled the home-buying frenzy of the last few years.
What many prospective home buyers and their agents don’t know is that buying a home with an interest rate below 4% or even below 3% is still possible. I’m not talking about rate buydowns or points paid on new loans. I’m talking about assuming the existing low-rate mortgage of a current seller.
Mortgage assumptions have not been commonplace since the 1980s. When I became a licensed agent in 1995, we would occasionally see a non-qualifying assumable loan hit the market, but they were quickly going away as rates began to steadily decline.
As rates have more than doubled from the lowest of the low available the last few years, assuming a mortgage is now an attractive option. However, it’s no longer the “wild west” days of the late 1980s where any old random person could complete a non-qualifying assumption. In today’s market, the only assumable loans are VA-, FHA- and USDA-guaranteed loans and they require a buyer to fully qualify to the standard of the loan when originally issued.
The growth of this market prompted us to create our company Assumption Solutions in early 2022 with the goal of helping process mortgage assumptions on behalf of buyers, sellers and their agents. Assumption Solutions will engage and collect the items necessary from a seller to directly communicate with the current loan servicer and prep them for a possible loan assumption transaction. Once the property is in an assumption purchase contract, we will collect all the required documents from a buyer that will be needed to approve the assumption with the servicer. We handle each transaction through a secure web portal managed by our processing team of long-time mortgage industry professionals.
This new market is in the early stage of growth, and education about mortgage assumptions must spread amongst the agent community. Since most agents in business today have been licensed for 10 years or less, understanding of what a mortgage assumption is, who qualifies or how to market a home with this asset is critical. We aim to fill this gap.
Let’s first talk about the important educational nuggets of mortgage assumptions.
- The available assumable mortgages, VA, FHA and USDA can only be assumed by an owner occupant purchaser.
- VA loans can be assumed by Veteran and non-Veteran alike, but Veteran to non-Veteran means that the VA loan entitlement amount left on the home by the seller remains tied up with existing loan. This doesn’t necessarily mean that the seller will have zero entitlement left to use on another VA purchase, but there is a complicated mathematical formula used to calculate remaining entitlement. Assumption Solutions has seen sellers go both ways based on their unique circumstances. Some have sold and made a large profit and chose to get a conventional loan in the future. Others won’t sell to anyone except a Veteran that can substitute eligibility. FHA and USDA have no such entitlement issues.
- The difference between the purchase price and the loan assumption amount we call the assumption gap. It should be viewed as the down payment. Everything we have processed thus far has involved buyers bridging the assumption gap with a cash down payment. That cash has come from either another home sale or from savings. There are no guidelines however that say the gap can’t be financed if you can find a source. We don’t have one currently. If you do finance the gap, it will be a factor in determining the qualification of the assumption with the existing servicer.
