As the housing market enters a bit of a plateau with interest rates steadying at higher levels, buyers and sellers who qualify may be looking to take advantage of assumable mortgages as an alternative to get into a new home. Mortgage assumption has been around for decades as an option to give a buyer the ability to take on the terms and loan balance of a seller’s listed home.
Originators may not reap financial benefits in every instance on assumable mortgages, because in many cases no new loan is originated. Still, there are good reasons to become familiar with this type of transaction.
“With an assumable mortgage, sellers have the ability to attract potential buyers who are sitting back and waiting for the right time to buy, without having to resort to a price reduction to increase the listing appeal.”
In the event the new client needs a second lien to complete the transaction, there is an opportunity for a possible financial benefit by an outside originator, an outside bank or the existing lienholder. Originators who know about assumable mortgages can generate goodwill with past clients and referral sources by helping them understand when this tool can be used. An originator could also potentially win the business of the seller, who in turn may be buying a house of their own with conventional financing.
Assumable clauses exist mainly within government-backed loans — which account for nearly 30% of the U.S. purchase mortgage market, according to the Consumer Financial Protection Bureau. Conventional adjustable-rate mortgages may also be assumable but only under specific conditions.
Lenders that own and service loans with an assumable clause offer buyers an upper hand in today’s market in which 30-year fixed rates have moved above 6% — much higher than even two years ago when rates bobbed between 2% and 3%. In fact, this type of loan has offered a silver lining to market spikes and post-spike plateaus a few times in the history of housing.
Shift things back about 40 years, when the average interest rate on a 30-year mortgage during the 1980s was well into double digits, according to historic data from Freddie Mac. Rates began to climb from about 9% at the end of 1977 to more than 17% by early 1982.
Although such rates may seem unimaginable now, they aren’t totally unrelatable. Back then, it was a seller’s market and it reached a point that some buyers couldn’t afford the mortgage payments. Sound familiar?
Not so differently from the current post- pandemic spike, rates steadily decreased and finally dropped below 9% in 1991, giving buyers the slightest window of opportunity. It wasn’t until the mid-to-late-‘90s that rates dipped more significantly into the range of 6% to 7% before experiencing some stagnancy, leaving movement in the market seemingly flat for a handful of years. The volatility experienced in the housing market of late mirrors only a fraction of what’s described above, but the post-surge interest rate plateau is one of the reasons that assumable mortgages are such a relevant topic.
The market hasn’t seen rates where they are today, above 6%, since the housing crisis of 2008, when the U.S. entered the Great Recession. The national average home sales price spiked in 2007 to a then-all-time high of about $322,000, according to the Federal Reserve. Sales prices then dropped and reached a low point of about $257,000 at the start of 2009. For movement to happen, sellers had to sacrifice potential profitability, and the average sales price didn’t climb back above $300,000 until early 2013.
With an assumable mortgage, sellers have the ability to attract potential buyers who are sitting back and waiting for the right time to buy, without having to resort to a price reduction to increase the listing appeal. Conversely, buyers have an opportunity to gain access to lower rates and lower mortgage payments, among other cost-saving benefits.
On the surface, it may seem like buyers benefit the most from the opportunities that assumable mortgages bring to the table, but sellers see their fair share of advantages too. These include such attributes as no appraisals, reduced funding fees and possible power over price negotiations — especially if the mortgage rate to be assumed is anywhere near or below 4%.
This can make the marketability for a home with an assumable mortgage (specifically given the state of today’s market) arguably stronger. Right now, if a seller does not have an assumable mortgage clause — most likely because they have a conventional fixed-rate loan — it’s business as usual.
Should they decide to put their house on the market for a certain amount, a buyer would have to qualify for a loan at the current rate. But a seller who lists their home at a similar price point and has an assumable mortgage that’s prospectively 3 or 4 percentage points below what it is today has a better baseline appeal. They could put themselves in a great spot to turn around and buy another home.
There are some items that are important to note regarding assumable mortgages. Freddie Mac loans are almost never assumable and it is a rare occurrence when a Fannie Mae loan is able to be assumed. Although some Fannie Mae adjustable-rate mortgages may be assumable, the borrower must qualify and they’ll have no option to convert the loan to a fixed rate.
Another point worth noting specifically relates to assumable mortgages with the U.S. Department of Veterans Affairs (VA). Although a buyer isn’t required to be a veteran to assume a VA mortgage, sellers with a VA loan cannot leverage their benefits as a veteran to buy another home until the first loan is fully paid off. This means the buyer must be a veteran who qualifies for a substitution of entitlement.
Since this is different from other qualifying hoops that may exist for U.S. Department of Agriculture and Federal Housing Administration loans, it can affect veterans who wish to leverage their homebuyer benefits on the back end of completing a sale by assumption. At any rate, once a buyer has qualified to assume the balance, terms and rate of the current borrower, they’d possibly be looking at a lower mortgage payment than if they’d bought a home at the same price with a conventional loan.
Even though the assuming borrower would have to leverage their downpayment or a second lien to pay off the equity the seller has in the home, they could still be left with a smaller principal balance. Under the right terms and rate, what buyer wouldn’t choose to save on the largest (and hopefully ever-appreciating) asset they’ll ever own?
In today’s high interest rate environment, assuming a mortgage could result in significant savings if the loan has a much lower rate compared to current market rates. Eligibility and creditworthiness applicable to these types of mortgages vary depending on loan requirements, and buyers must qualify to assume a mortgage based on what was originally outlined.
Rates hit record lows in 2020, dipping well into the 2% range, and created so much buyer demand at the time that sales prices saw a severely steep spike. Rates have since increased and made the home purchase market less accessible by way of conventional loans. So, even if there’s at least 25 years left on the term of an assumable mortgage that’s currently on the market with a rate anywhere below 4%, a buyer is likely to get more for what they’d spend on a conventional listing. That’s in addition to perks such as lower funding fees and other settlement costs.
As with most money-saving purchases, finding an assumable mortgage that’s right — especially once the equity payoff is calculated — takes some searching. It’s important for mortgage originators and real estate agents to have a pulse on lender portfolios and how long these lenders have serviced government- insured loans.
Since a prospective buyer will assume the loan from the current lender or servicer, it’s always reassuring to understand the size of their portfolios and how frequently they already service loans of this type. With some stagnancy in the market, buyers are looking to make the most informed decision possible, even when the benefits of the purchase can be as apparent as a smaller monthly payment.
At the end of the day, there needs to be a way to appeal to buyers and sellers so that the housing market pendulum will swing back in the right direction. An assumable mortgage is certainly a favorable route to get there for both audiences. ●