How to (still) get an interest rate below 3%
Have you ever heard of an assumable mortgage?
Perhaps you heard of someone recently getting a 3% loan despite average rates being above 6% and wondered, “How did they do that?”
Clients of mine saw a home for sale last week advertising a sub-3% “assumable mortgage” and asked me about it - which made me slap myself that I hadn’t written about them previously.
(Don’t panic. Assumable mortgages are attractive marketing and simple on paper, but are rare to execute in real life, for reasons I’ll explain below.)
What is an assumable mortgage?
An assumable mortgage is a government-backed mortgage loan (like FHA or VA) that can be taken over - or assumed - by a buyer. This includes the loan type, terms, interest rate, and loan balance.
Example
A seller with a 3% interest rate, an FHA loan, 25 years left on their term, and a $200,000 balance sells their home to a new buyer for $400,000. This buyer assumes the seller’s loan and gets all the benefits of the sellers’s low interest rate and monthly payment, thus saving the buyer hundreds of dollars a month on their monthly payment.
Why isn’t everyone doing this? What’s the catch?
Assumable mortgages are rarely executed in real life for five main reasons.
The buyer must bring cash to make up the gap between the sale price and the seller’s existing loan.|
In the example above, the buyer would need to pay the seller $200,000 cash to close the gap between the purchase price and the existing $200,000 loan.
FHA loans are commonly found on smaller, cheaper starter homes (because FHA loans generally offer more accessible terms for first-time buyers). First time home buyers rarely have large amounts of cash.The buyer must assume the loan type of the seller.
For FHA sellers, the buyer must assume an FHA loan. For VA sellers (VA is a loan type reserved for service members, veterans, and their families), the buyer must assume the existing VA loan. This can provide some complications, particularly for VA sellers who wish to sell to a non-VA buyer.The buyer must work with the seller’s lender.
Because the buyer is taking over the seller’s loan, they must get qualified through the seller’s lender and work with them to obtain the new loan. This would generally not be an issue were it not for…Assumable loans often take a long time to close (commonly 90-180+ days, compared to 25-30 days for a traditional loan).
A mortgage lender often lacks the systems to process assumable loans in a timely manner because they make little-to-no money in the process.Assumable loans are only* eligible for owner-occupied properties
A buyer assuming a mortgage must plan to occupy the property within 60 days of closing and live in it as their primary residence for at least 12 months.
*certain exceptions with VA loans do apply
So, why bother with assumable mortgages?
For buyers, the opportunity for the huge monthly savings that comes with a low interest rate can be too big to ignore altogether.
There are new companies (Roam is perhaps the most popular) that now guarantee a 45 day close on assumable loans in exchange for a fee. With Roam, 1% of the purchase price is charged to the buyer at closing as an additional closing cost (this could be negotiated to be paid by the seller).
Roam also offers a second-mortgage financing option which can help provide the cash needed to close the “gap” referenced in #1 above.
Some lenders, despite the lack of financial incentive, are still able to process assumable loans at a manageable pace. For sellers who have a home that hasn’t sold in 90+ days on the market, they might be willing to take the “risk”of an extended close if if means finding an interested buyer.
Please reach out if you’d like to learn more about how assumable mortgages might open up home buying or selling options for you.
If you have a desire to buy or sell in 2024, let’s chat.
Life has a way of keeping us all moving, and I love to be your real estate agent.
Contact me here to set up your free and confidential consultation.
Kevin
