Can You Turn Back The Clock on Mortgage Interest Rates With an Assumable Mortgage?

Mortgage interest rates are top of mind in 2023’s real estate market no matter your role, but it’s particularly relevant for buyers. An interesting option for both buyers and sellers (and their Realtors) to be aware of is the assumable mortgage. If you’ve been around the real estate business for a while, you’re probably aware of this, but it’s not all that common anymore.

What is an Assumable Mortgage?

An assumable mortgage allows a buyer to take over the seller’s mortgage at the purchase of the home. Why would you do this? Well, if they bought their home in 2020 at a 2.75 percent interest rate, and you can take over the existing mortgage, that’s a heck of a selling point.

The catch? Not every mortgage is assumable. Conventional loans are not assumable. You can only assume a VA, FHA, or USDA loan. You do not, however, have to be a Veteran to assume a VA loan. Wait, what? I know this whole thing gets a little tricky, but stay with me, it’s worth it.

An Assumable Mortgage Case Study

Once upon a time in 2023, there was a beautiful home for sale in Driftwood, just outside of Austin, in a tony neighborhood called Rim Rock. This neighborhood was in high demand for its gorgeous homes, neighborhood amenities, and great schools. But despite being priced competitively, and even dropping the price below market value after a couple of weeks on the market, no one was biting. The seller’s agent, Julie Gualandri of Austin Portfolio Real Estate, had an idea. The house was offered at $1.35 million, and the owners had a VA loan on the house currently at $1.153 million, which they had written at 2.375 percent. She started marketing it as an assumable mortgage and got an offer within a few days.

“Kudos to that agent,” said Lisa Peters of Cardinal Financial. “She’s using every tool available to maneuver in this environment.”

How Do Assumable Mortgages Work?

I spoke with Peters to get a better picture of assumable loans, and whether this is a scenario we might see more often.

“If it’s a VA loan, the Veteran’s Administration has to approve the new borrower, which shouldn’t present an issue, but it will tie up the current Veteran’s entitlement.” So if you’re considering selling your home, and rising above the competition with your fantastic assumable mortgage rate as a perk, know that means on your next house you will not be able to use your VA benefit to get a loan.

FHA loans are the other main type of loan that you can assume in a real estate transaction. (USDA loans are limited to rural areas). Again, the buyer has to be approved by the FHA, which is not the issue, but Peters says problems can arise with timing because both the VA and FHA can take up to 60 days to approve these transactions, and of course, often buyers and sellers aren’t willing to take that kind of time. But the good news for buyers assuming an FHA loan is that the down payment requirement is only 3.5 percent, which could be particularly important with an assumed loan because you’re going to have to make up the difference of the purchase price in cash.

Yes, that’s the other pitfall of an assumable mortgage. You can’t double-dip. Well. Never say never, but most people are not going to be able to get two different mortgages on the same house. If you want to purchase a $650,000 house that has a $400,000 assumable mortgage at 2.5%, (rather than opting for a 6-7% rate on a conventional loan in today’s market), you’d still have to come up with the remaining $250K.

Are Assumable Mortgages the Wave of the Future?

“I can see real estate investors being able to take advantage of this, and people who can put a lot of cash down really benefitting where it’s available,” Peters said, when I asked if she thought this type of transaction might become more common in the current market. But it’s a pretty limited proposition. You have houses purchased during a certain time frame when rates were low, with specific (and less common) loans, and this will only last until rates drop back to around 4 percent.

In the meantime, loan types are searchable in the MLS, and I say when a window of opportunity opens, you should go through it.