(NewsNation) — It’s hard to find a good deal in today’s housing market, but some buyers have managed to wind back the clock, taking over assumable mortgages at much lower interest rates than the current market average.
Though they still account for just a fraction of new mortgages issued each year, assumable loans have become more popular recently.
Together, the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) handled over 6,400 assumptions last year, more than double the year prior, according to the Wall Street Journal.
Here’s what to know about assumable mortgages and how to find one.
What is an assumable mortgage?
An assumable mortgage allows the buyer to purchase a home by taking over the seller’s mortgage at the existing terms. That enables buyers to lock in a lower interest rate.
For example, if the seller secured a mortgage at a 3% rate, the buyer would assume that loan and avoid taking out a new mortgage at today’s higher rate. Over the length of the mortgage, that could mean major savings for the home buyer.
For sellers, an assumable loan is a marketing advantage that makes the home more appealing to buyers and gives them leverage at the bargaining table.
Most conventional mortgages aren’t assumable, but typically, government-backed loans are. That includes mortgages insured by the FHA or backed by the VA as well as the United States Department of Agriculture (USDA).
According to Realtor.com, roughly one in four mortgage loans originated in the past five years were assumable government loans.
How do I find one?
Although they make up a significant share of active mortgages, finding an assumable loan can be hard.
Through the first two months of the year, just 0.4% of U.S. for-sale listings advertised an assumable loan, according to Realtor.com.
New online search tools have tried to make it easier. Websites like Roam and AssumeList help users find homes with assumable mortgages.
Searching by keyword on other platforms is another option. Try using terms like “assumable” or “VA” to narrow the results.
You can also reach out to a realtor who can access additional listings.
Just like any other type of loan, buyers still have to qualify for an assumable mortgage. That means having a good enough credit score and a low debt-to-income ratio.
Will I save money?
A lower mortgage rate sounds like a surefire way to save money, but there are upfront costs that come with assuming a loan. The biggest factor is the down payment.
That’s because a buyer only assumes the seller’s outstanding balance — they still have to pay for the rest of the home.
Take a $400,000 house that has an assumable mortgage with a $250,000 balance. In addition to paying the rest of that loan, the buyer still has to come up with $150,000. If they can’t pay out of pocket, they will have to take out a second loan at today’s rates.
Given the way home values have surged in recent years, the difference between the assumed mortgage and the price of the home could be significant.
Are there other downsides?
There can be additional red tape when assuming a mortgage, which means it often takes longer to close.
That process can take anywhere from 45 to 90 days or longer for assumable mortgages, whereas buying a home with a new mortgage generally takes about a month to 45 days in many parts of the country, the New York Times reported.
Some of the delay is due to a lack of urgency on the part of mortgage companies that make significantly less money handling an assumption than they do writing a new loan. Both the FHA and VA cap how much mortgage servicers can charge for assumptions, the Times said.
There’s also less flexibility with assumable mortgages. Buyers are bound by the original loan terms and can’t shop around for better deals.
Sellers also have to be careful who they transfer their loan to. For example, if a nonveteran assumes a VA home loan, the seller could lose all or part of their entitlement to another VA loan until the previous one is paid off.