How A Rare Type Of Mortgage Is Landing Homebuyers A 3% Mortgage Rate

My wife and I have been looking for a new home for the last two years. This is Wes Vandell. He is a new homeowner who is facing many of the same issues other prospective homebuyers have faced in this hot housing market. We really just hadn't had much luck, mainly due to increasing interest rates, driving up the cost of our mortgage. We did put in a couple of offers that didn't go anywhere just because it's a it's a very hot housing market here. But the Vandell story is a little different than most homebuyers navigating the market right now. We found one that popped up. It was the right size, it was the right area, but we knew it was a little bit out of our budget just because the interest rate was too high. Just happened to look at the Realtor app again and there was a button on that app that said this home has an assumable mortgage. What the Vandells found is a rare type of mortgage called an assumable mortgage, landing them a 2.6 percent mortgage rate as opposed to the 2024 average, which sits just above 6 percent. An assumable mortgage is a type of home loan where the buyer can actually take over the existing mortgage terms from the seller. That meant a difference of over $800 a month. A common occurrence in the 1970s and 80s, assumable mortgages are a rare find in today's real estate market. In 2023, only 4,052 federal housing administration mortgages were assumed. That's still a 59 percent increase in FHA mortgage assumptions since 2021. For Veterans Affairs mortgages, the jump is even larger, with 2,244 mortgage assumptions in 2023, an increase of 713 percent compared to 2021. And 2024 assumptions are already outpacing previous years for both the VA and FHA. So what are assumable mortgages? How do they work and why aren't they more common? The vast majority of homeowners don't actually know that they have an assumable mortgage. Buyers don't know how to find them and agents don't know how to coordinate the purchase. While assumable mortgages might be a rare find, public interest in them is climbing. Google searches for the term assumable mortgage have climbed in tandem with increasing mortgage rates over the past two years. This is the most unaffordable time to purchase in America of the last 40 years. 60 million people were priced out for being able to purchase a home. When it comes to the average U.S. homebuying experience, most Americans follow the same process. A buyer approaches a lender to get pre-approved for a mortgage. When the buyer settles on a home, they use their own mortgage to cover the cost at a fixed rate. The homebuyer then pays off that mortgage over the term of the loan, normally 15 or 30 years. What an assumable mortgage offers is the option to take over the seller's loan. So instead of taking out your own loan at a new rate, you inherit the remainder of the seller's mortgage at whatever rate they took it out at. So a homebuyer that took out an assumable mortgage in 2020 could offer an interested homebuyer a sub-3% mortgage rate. For the homeowner, the value of including their low-rate mortgage in their home sale is to maximize their probability of being able to sell the home by expanding the universe of buyers who can afford to purchase it. In the 1970s and 80s, U.S. interest rates hit record highs, peaking at 18% in 1981. Assumable mortgages were more popular then, but have largely fallen out of public consciousness following the passage of the Karn St. Germain Act in 1982, allowing private lenders to ask for immediate repayment if a property is sold. This is called a due-on-sale clause. Assumable mortgages are not really popular at all, simply because they're very limited. Assumable mortgages do come with their own set of hurdles. The possibility of higher-than-expected down payments, knowledgeable lenders and real estate agents, and the fact that they're only offered through government-backed loans. VA, FHA and United States Department of Agriculture mortgages are now the main type of mortgages able to be assumed in the U.S. The most popular state in America for assumable mortgages is Texas. This is because there's a large military population there, also a large first-time homebuyer population there. We are a military community, so there's an Air Force base in our community where there are a lot of VA loans. It's also a younger college town, so there's a lot of FHA loans within our community. And government-backed loans mean more paperwork. So if you are looking to enter into an assumable mortgage, get ready to settle in. They can take a while to close. Assumable mortgages are very complicated and they involve a lot of paperwork. And that's why a lot of lenders simply don't want to do them. Some don't even really understand them. So there's a lot more detailed information that is required. We were told right up front by the mortgage company that the process is going to take at least 90 days. Homebuyers should also be prepared to put down more money than the typical 20 percent down payment. Assumable mortgages require buyers to cover the money already paid towards a mortgage, as well as any appreciation on the home price. We've seen really rapid home price appreciation. So somebody who has a home that they had 20 percent equity in may now have a lot more money in that home than they originally had. For example, say a homeowner took out a 30-year fixed-rate VA loan for a home at $200,000 and paid off about $25,000 of that over two years. The person assuming the mortgage would have to pay the buyer the money they've already invested, that $25,000. Additionally, if that homeowner decides to sell their home for $250,000, the buyer has to cover the additional $50,000 in appreciation, either in cash or by taking out a second mortgage. A little bit of a guessing game initially because you're negotiating on what the sale price will be of the house, of course. You don't really know up front what is owed on the house either. Got lucky in that respect where what was owed on the house versus what we had settled on for a sale price was almost exactly that same 20 percent we had saved for our down payment. One of the biggest hurdles for getting an assumable mortgage? Awareness, not just by buyers, but sellers who don't want to advertise their home as assumable. So about a fifth of the homes on the market or 20, 25 percent of the homes on the market will be fully assumable at one time. The number of assumption transactions that are happening is far fewer than the number of mortgages which can be assumed. While assumable mortgages can be hard to find and at times complex, companies like Realm are working to streamline the process for buyers and sellers. 97, 98 percent of the people who have these loans don't know that it can be a marketing advantage because what kind of homeowner sits around thinking about their loan type being the marketing advantage in their home sale? Other companies like Assumable I.O. and AssumeList can help match interested homebuyers with assumable mortgages. I think once that word starts getting out, this is a possibility. We're going to see more and more of these pop up.