As mortgage rates continue to hover between 7% and 8%, many home buyers have found it difficult—almost impossible—to break into today’s housing market. High monthly prices, coupled with a lock-in effect in which homeowners are reluctant to give up mortgage rates below 4%, have prolonged the frozen housing market.
But there’s one little-known trick to getting a lower rate: an assumable mortgage. Earlier this month to roama company that specializes in helping buyers find homes with mortgages below 4% that they can take on, announced a new feature where buyers can purchase a home with a 2% mortgage and a down payment of just 15%.
An assumable mortgage allows a home buyer to purchase a home by taking over the mortgage from the current seller. They are available for all government-backed loans; FHA and VA loans are eligible and account for about one-third of mortgages in the United States. While trying to get one of these low-interest mortgages may seem like a no-brainer for first-time homebuyers, assumable mortgages have historically been challenging. obtain in terms of both availability and accessibility.
“There were two reasons why the estimated loan volume was not the same as the purchase loan volume,” says Raunak Singh, founder of Roam. Luck. First, “sellers often took six to nine months to close a deal.” [and two] buyers required a large down payment of 35%.”
By accepting the mortgage, the seller is released from the mortgage entirely, placing full responsibility on the new buyer. The buyer must also cover the seller’s equity in the home, which means he must pay the difference between the purchase price and the seller’s outstanding mortgage balance at closing, Roam said.
“In general, credit assumptions can be difficult for first-time homebuyers because they will need either sufficient cash flow or secondary financing to pay off the homeowner’s equity,” Chris Birk, vice president of mortgage analysis and director of education at Veterans United Home. Loans, says Luck.
But the new Roam product feature supports buyers with a down payment by allowing them to browse listings and determine a blended rate (the old market rate and the new rate) and monthly payments based on the amount they are actually able or willing to put down on the home. . For example, according to Roam, a buyer interested in purchasing a $400,000 home could use Roam Boost to get 20% off a home with a 4.3% down rate. This would save them over $500 a month, given today’s higher mortgage rates. Roam also guarantees closing within 45 days, which is much faster compared to other mortgage assumptions that can take months to complete.
Their “seller guarantee tells sellers that we will close in 45 days or pay their mortgage until we close,” says Singh.
How common are assumable mortgages?
While Roam’s announcement this month has sparked more talk about assumable mortgages, they are still relatively rare in the lending world. This is because most loans in the US do not qualify for assumable mortgages because they are backed by private individuals, as opposed to loans administered by the government.
“For a lot of people, it’s not even an option to consider, but there’s definitely a lot of curiosity and misinformation about their availability,” says Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage. Luck. “This conversation always seems to come to the surface when we are in a rising stakes environment.”
Indeed, over the past few years, mortgage rates have risen from 3% to 8% last fall. Additionally, home buyers considering a presumptive mortgage should remember that they need to get approved for a loan, just like they would for a new one.
However, interest in assumable mortgages only continues to grow in today’s housing market.
“FHA and VA loan assumptions more than doubled in 2023 compared to the previous year. Interest in VA mortgage assumptions has increased dramatically over the past two years,” Birk says. However, “buyers will need to consider the homeowner’s equity. Potential buyers taking out a loan often pay the homeowner’s share in cash. This could mean paying tens or even hundreds of thousands of dollars by the final table.”
What does an assumable mortgage mean to lenders and banks?
Although loan assumptions are essentially just taking over an existing mortgage, this may seem like a bad deal to lenders.
“There is a concern that [assumable mortgages] can be harmful because lenders want their mortgages to reflect the current interest rate environment and make sense to them,” says Alvarez. “At the end of the day, [mortgage lending] “This is a business, and banks do not want to always provide loans at rates significantly below market rates.”
And while there isn’t much light at the end of the tunnel in terms of a potential drop in mortgage rates, they will eventually fall a little.
“When rates go down, no one will want to take out a higher-rate mortgage,” Alvarez says.