Want a low mortgage rate? Take someone else’s

(CNN) — For homebuyers struggling to afford a home amid stubbornly high mortgage rates and surging prices, there’s a little-known workaround that can help turn back the clock to the days of ultra-low monthly mortgage payments. But it comes with a few caveats.

Assumable mortgages are loans that allow a homebuyer to take over a seller’s existing mortgage. This means that a buyer keeps the seller’s repayment period, mortgage balance and, notably, the seller’s lower mortgage rate. Some experts point to this type of loan as a potential way of reviving the struggling housing market.

“It’s a really great program for today’s market,” said Ted Tozer, the former president of Ginnie Mae — a government-owned corporation within the Department of Housing and Urban Development — and a non-resident fellow at the Urban Institute.

About 12.2 million US mortgages are assumable, according to data from Intercontinental Exchange. That amounts to 23% of all US mortgages.

But while assumable loans could benefit both sides of a homebuying transaction, there are some drawbacks, including a longer approval process, Tozer said.

“The sellers should be able to get an extra 1% or 2% for their home to compensate them for the value they are transferring,” he said. “The buyers’ advantage is that they can have a lower mortgage payment over the life of the loan than they would have gotten with a new mortgage.”

A little-used benefit of government loans

Ellen Harper, a software analyst in her mid-50s, closed on a Fairburn, Georgia, home with a 2.49% mortgage rate in April after first learning about assumable mortgages in the fall.

Securing that ultra-low mortgage rate means that Harper will save thousands of dollars in monthly payments. In mid-April, the 30-year fixed-rate mortgage averaged 7.10%, reaching the highest level since November.

“I just decided I wanted to see how low I could pay on the interest rate,” Harper said. “I went into it looking for the best deal I could get, and I think I did pretty good.”

Not all home loans can be passed to a homebuyer, but most government-backed loans, such as those from the Federal Housing Administration and the US Department of Veterans Affairs, are assumable.

The number of FHA-backed loans assumed grew 111% between 2021 and 2023, while the number of VA-backed loans assumed grew 713% in that same time period, according to government data provided to CNN.

Still, in the American real estate market, mortgage assumptions are relatively rare. There have been just 2,973 FHA-backed mortgage assumptions so far this year, according to the agency.

How does an assumable mortgage work?

The process of assuming an existing mortgage is a bit different from getting approved for a new home loan.

For example, suppose a seller with an assumable loan chooses to list their home at $500,000 and their current mortgage balance is $300,000. In that case, that home seller currently has $200,000 in equity (the difference between $500,000 and $300,000). To take over that seller’s mortgage, a buyer would have to make a cash payment of $200,000 to the seller to compensate for their equity stake. Then, the buyer would take over the sellers’ existing monthly payments on their mortgage.

For buyers, $200,000 may be a lot of money to pay upfront. Some take out a second mortgage to cover the equity payment, Tozer said. And while the mortgage rate on the second loan may be high, the total monthly payment could still be lower — if the assumed mortgage rate is low enough.

Generally, an assumable loan must be approved by the seller’s lender and the VA, FHA, or other government agency backing the loan. That means not only are there more layers to get through, but a homebuyer must also meet specific credit and income standards before getting approval.

Is there a catch?

Snagging a low mortgage rate like Harper’s in today’s high interest rate environment may seem like a dream come true to some prospective homebuyers, but the process is not always smooth sailing.

Tozer said lenders often delay approving mortgage assumptions because the VA and FHA cap the amount of money the lenders can make processing these applications.

“People have complained that the assumptions are taking substantially long periods of time to close and because of that, sellers are getting frustrated and the Realtors want their money,” Tozer said.

Another potential downside for holders of VA-guaranteed loans: According to the department, passing your mortgage along to a civilian may slow down your ability to get approved for another VA loan.

Even so, assumable mortgages may hold an appeal for homebuyers who missed the boat on lower interest rates. Finding an assumable mortgage with a willing seller may be akin to “unicorn hunting,” said one commenter on social media.

The relative rarity of these mortgages also means some folks may have misconceptions about how they work. For example, Harper said her seller was initially skeptical about her taking over their home loan, erroneously believing he’d be on the hook if Harper missed mortgage payments after taking over the mortgage.

“We put in an offer a couple of times in the beginning and he wasn’t comfortable, so the offer expired without him accepting it,” she said of her homeseller.

Harper used Roam, one of a growing group of real estate start-ups focused on helping buyers find homes that allow mortgage assumptions.

For now, Roam is only available in Georgia, Arizona, Colorado, Texas and Florida, but Roam’s CEO, Raunaq Singh, told CNN he plans to launch nationwide later this year.

Harper said the company helped educate her home’s seller about assumable mortgages, reassuring him that he would no longer be responsible for the loan once it was taken over by Harper.

Harper’s persistence paid off.

“After that, he did sign the offer,” she said.

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