Home loan borrowing costs climbed again this week, pushing the average long-term U.S. mortgage rate to its highest level in nearly 23 years, another blow to prospective homebuyers facing an increasingly unaffordable housing market.
How is a buyer to get any relief from a sky-high monthly payment? An assumable mortgage might be one option. An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and terms are transferred from the current owner to a buyer. This type of mortgage allows a buyer to “assume” the current principal balance, interest rate, repayment period, and any other contractual terms of the seller’s mortgage.
Not all types of loans qualify, and there are pros and cons to consider. Conventional loans are rarely assumable because the mortgage contract usually contains a “due-on-sale” clause which allows the lender to demand the entire remaining loan amount as soon as the property is sold. What kinds of mortgages are assumable?
FHA (Federal Housing Association) Loans are assumable when both buyer and seller meet the qualifications for an assumption. The property must in fact be an FHA loan; be used by the seller as their primary residence, and the buyer must first qualify for an FHA loan (including credit score, two-year employment history, etc.).
The Department of Veterans Affairs offers mortgages to qualified military members; however, to assume a VA loan, the buyer need not be a member of the military to qualify, although most buyers who assume these loans are military members. For loans initiated before March 1, 1988, buyers do not need the approval of the VA or the lender to assume the mortgage.
USDA (US Department of Agriculture) loans are offered to buyers of rural properties, require no down payment, and often have low-interest rates. To assume a USDA loan, the buyer must meet certain requirements and receive approval from the USDA. This loan is only assumable if the seller is up to date on all payments.
In this market, where equity and home prices have risen significantly, an assumable mortgage will be most advantageous to a buyer when the seller’s equity is low (i.e., they have not owned the home very long, took a cash-out refinance on their loan, etc.). The advantages to acquiring an assumable mortgage in a high-interest rate environment are limited to the amount of existing mortgage balance on the loan or home equity. Clearly, this scenario is rare considering the current real estate market, but it’s not impossible! Would-be buyers should still shop in their approved price range and proceed with their original buying plan, but once they identify a home, it’s worth investigating to see if an assumable mortgage is a path to affordable homeownership.
