In today’s high interest rate real estate market, mortgage assumptions have gained traction - giving buyers the opportunity to finance a home at a lower rate. According to American Banker, mortgage assumptions are already up more than 67% from last year and more than 100% from 2021. Mortgage bankers and subject experts say the trend is to be expected considering the Federal Reserve's swift campaign to raise interest rates from effectively zero to more than 6% in a little more than a year in 2023.
How does an assumable mortgage work?
An assumable mortgage is a loan that can be transferred to buyers with the same interest rate, term and payments. If a seller has a loan that can be assumed and the buyer qualifies for the loan, the buyer can take over the mortgage. They will then make payments on the remaining balance at the same rate and term as the original borrower.
For example, if sellers took out a 30-year mortgage at 4% six-years ago, the buyers would make the remaining 24 years of payments on that loan until they refinance, sell the house or pay the loan in full, in addition to paying the seller for the amount they paid on the mortgage.
It is important to note that not every loan is open to assumption. Assumability is typically a feature of certain types of loans, like those backed by the Federal Housing Administration (FHA), the Veterans Administration (VA) and US Department of Agriculture (USDA) loans.
Lorraine Perez, assistant vice president at ServiceLink, leads the mortgage assumption process for servicers and lenders, in addition to working with buyers and sellers. “We’re very well-versed in the mortgage assumption,” says Perez. “Once lenders have finalized the pre-approval process with buyers, ServiceLink is able to step in and lead the process - completing title work and running all parties’ current and future judgements and liens. We work to get payoffs and close out all outstanding accounts so the lender remains in first position.”
Primarily seen in cases of divorce, or transitioning a home from parent to child, mortgage assumption is not a new concept; however, it is uncharted water for many in the mortgage industry. Having the knowledge base that ServiceLink offers helps to keep lenders ahead of their buyers’ questions. ServiceLink operates as subject matter experts, helping lenders to clearly articulate eligibility requirements and provide a better experience for the borrower.
The pros and cons of an assumed mortgage
The advantages of an assumable mortgage in a high interest rate market are based on the amount of existing mortgage balance on the loan or the home equity. For example, if the purchase price of a home is $250,000 and the seller's assumable mortgage only has a balance of $110,000, a down payment of $140,000 is necessary to cover the difference. In many cases a separate mortgage is necessary to secure the additional funds.
If the seller’s home equity is high, a second mortgage is necessary on an existing mortgage balance - with a potentially higher interest rate. On the other hand, if the seller’s home equity is low, the assumable mortgage has greater benefits. In the same instance, if the value of the home is $250,000 and the assumable mortgage balance is $210,000, you only need to put up $40,000 - which can be paid in cash directly to the seller without securing another line of credit.
“We have experience with assumable mortgages in every state,” says Perez. “We have a good understanding of what needs to happen and actively work to help to streamline their processes. We prepare the deed from the current to the new owner, prepare an owner affidavit, making sure that nothing has significantly changed with the property. We schedule our closings with each party in a location convenient for them. Once lenders approve the documents, we fund, close and disburse the file.”
Mortgage assumptions can take a bit longer to close, but the loan stays with the originating lender and accrues interest. Assumed mortgages may not be as profitable as a traditional purchase or refinance, but they do offer a viable option in a tough market. As buyers continue to search for options, the mortgage industry is encouraged to stay ahead of this curve. A partner like ServiceLink can provide consultation and guidance as you help clients make informed decisions that align with their financial futures.
