Amged Baker, a 40-year-old software developer, wanted to move to a bigger home as the Florida native transitioned into a new role at work that allowed him to be permanently remote. He also wanted more space for his two kids.
But Baker, who works for a real-estate platform, knew that it wasn’t that simple to trade up. Mortgage rates had doubled and home prices continued to rise. In his hometown of Palm Beach County, Fla., home prices soared by nearly 60% over the last five years.
He sold his previous home for $600,000, which had a 30-year mortgage rate of 2.8%. However, he was prepared to give up that rate if he could avoid paying a rate of 7%.
Baker was intrigued by assumable loans. Having refinanced his current home during the pandemic, he was keenly aware of the value of his ultra-low mortgage. He knew his monthly payments would be a lot more affordable with an assumable mortgage — and so his search began.
He’s not alone. It appears to be the housing market’s latest obsession — homeowners, buyers, and real-estate agents are all talking about assumable mortgages.
Across real-estate brokerage sites, listings boast that the home comes with an “assumable mortgage,” described in glowing terms as a “rare find,” “game-changer,” or as one buyer said on social media, “white whale.”
What are assumable mortgages?
With assumable mortgages, the loan — and, importantly, its interest rate — is passed from the seller to the buyer when a house changes hands.
With the U.S. housing market frozen by high rates and low inventory, it’s clear why people have turned their attention to assumable loans. They’re particularly appealing now because they offer homeowners a way to potentially capitalize on their pandemic-era ultra-low mortgage rate by passing it on.
Here’s the catch: Only certain types of loans can be assumable mortgages. The seller must have a government-backed home loan, which is insured by the Federal Housing Administration, Veterans Affairs, or certain loans by the U.S. Department of Agriculture.
“‘Folks don’t want to give up those assumable mortgages because they’re just as attractive to them as they are to you.’”
These government agencies allow homeowners to transfer ownership of the mortgage to a new home buyer under certain conditions such as the new buyer having good credit, an acceptable debt-to-income ratio, and more.
For the typical home buyer today who is facing a 30-year mortgage with a rate over 7%, assuming an existing mortgage with an interest rate as low as 1.75% is an enticing proposition. It offers an alternative to buying points — fees a borrower pays the lender to cut the mortgage rate on their home loan — or taking out an adjustable-rate mortgage, which comes with its own risks.
For the seller, an assumable mortgage presents another feature to play up when listing their home. There is also, perhaps, some comfort in knowing that their ultra-low interest rate will be inherited by the buyer.
Assumable mortgages were popular in the 1980s
“For the last 40 years, rates have been falling, so nobody cared about assumability,” said Tod Tozer, former president and CEO of Ginnie Mae. “So we’re basically back to the future — we’re back to 40 years ago when 30-year mortgages were close to 13%, 14% back in 1981. And they’ve been falling ever since.”
Ginnie Mae securitizes all FHA, VA, and USDA mortgages for the secondary market. Tozer has also written about assumable mortgages being a “solution” to today’s frozen housing market, as the seller will be able to “receive top dollar for the sale of their home,” and move to another place.
Assumable mortgages were popular in the 1980s when mortgage rates were in the double digits. Back then, many conventional loans were assumable. “It was the standard of the industry,” Tozer said.
But assumable mortgages aren’t as common as a conventional loan, making them hard to come by.
Based on the market today, only 12 million mortgages are potentially assumable, which is less than a quarter of all mortgages in the U.S., according to loan-level data from ICE. Of these mortgages, which are primarily FHA, VA, and USDA loans, about 7.2 million or 14% have a mortgage rate of below 4%.
Assumable mortgages can be difficult to find, and it can also be difficult to get homeowners to part with their loan if the alternative is to buy a house with a much higher interest rate.
“Folks don’t want to give up those assumable mortgages because they’re just as attractive to them as they are to you,” said Andy Walden, vice president of enterprise research strategy at ICE, or Intercontinental Exchange, a data company.
Additionally, even after a buyer takes over the mortgage, they will still need to cover the difference between the outstanding balance and the sale price, Walden told MarketWatch.
How assumable mortgages work
So how do they work? Imagine an aspiring homeowner views a home valued at $375,000, and the home comes with an assumable mortgage of $225,000. The buyer in this situation will need to put down $150,000 in cash, or find other financing after they assume the mortgage.
If the buyer requires secondary financing, it will likely come at a higher interest rate, which will offset some of the savings from the assumable mortgage. Nonetheless, for homeowners who are keen on selling, if they have an assumable mortgage, their house will become more attractive to buyers.
“Veterans across the country are sitting on these ultra-low rates,” Chris Birk, vice president of mortgage insight at Veterans United Home Loans, told MarketWatch. “So they’ve got this incredible marketing opportunity.”
“‘Veterans across the country are sitting on these ultra-low rates. So they’ve got this incredible marketing opportunity.’”
And yet of the 69,000 VA purchase loans that his company processed in 2022, only about two dozen were assumptions.
There’s a lack of awareness about assumable loans, Jason Mitchell, chief executive of Jason Mitchell Group, a Scottsdale, Ariz.-based real-estate brokerage, told MarketWatch.
The first question real-estate agents should ask homeowners who are listing their homes is whether their mortgage is assumable. “If you can mark it as an assumable mortgage at 3.5%, you’re gonna get a better price on your house,” he added.
What happens if the new buyer defaults on the assumable mortgage?
The person who assumes the mortgage also becomes responsible for paying the loan on time. If the new buyer stops making their mortgage payments and goes into default, that does not mean the original owner will be required to pay up.
With FHA loans, “once the assumption is complete, it is a full release of liability for the previous borrower, which means the new borrower (the borrower that has assumed the mortgage) has full responsibility for all aspects of the mortgage,” a HUD spokesperson told MarketWatch.
Similarly, with VA loans, when another buyer assumes the mortgage, there is a release of liability, Birk added. The veteran who owned the home previously isn’t financially responsible if the new owner defaults.
One man’s search for an assumable mortgage
During his search, Baker, the software developer, contacted Chris Tapia, a 41-year-old real-estate broker with Compass Florida. Tapia had met Baker three years ago when the homeowner bought his first home in Palm Beach, and the pair had become good friends.
Tapia had recently introduced the idea of assumable mortgages to Baker. The agent believed that it was one key way for home buyers to take back the purchasing power they lost as homeownership became more expensive.
“Everything is so phenomenally expensive that no one can really afford anything right now,” Tapia told marketWatch.
In his quest for assumable loans, Baker specifically looked for homes that were financed with a mortgage from the Federal Housing Administration, Veterans Affairs, or the U.S. Department of Agriculture.
He then searched home listings from various online brokerages to identify those that were financed with an FHA or a VA mortgage. He also looked at services such as FHA Pros, a site that provides real-time data for FHA and VA condominium approvals.
But homeowners can also look for listings with assumable loans via Google with the following search term: site:compass.com “assumable.”
MarketWatch found several new and old listings advertising assumable mortgages in the home’s description.
Finding an assumable rate of 3.05%
Baker and Tapia attended 20 open houses in Palm Beach County.
They made four offers and ultimately closed on a four-bedroom single-family home in Palm Beach County for $620,000. Baker took over the seller’s 30-year fixed-rate mortgage, under the assumption rules. It has a 3.05% rate.
He currently holds a Federal Housing Administration loan with an outstanding balance of $324,000. As a result, he put down $269,000 in cash.
The seller had only paid off about 3 years on their 30-year loan, so Baker took it over with a monthly payment of about $1,500. He estimated that buying the home with a conventional mortgage at the prevailing rate would cost closer to $2,300 a month.
Baker closed on the home in June 2023, and because he assumed the seller’s loan he did not have to pay thousands of dollars in closing costs.
“You will be hearing about assumable loans more often,” Tapia, the broker, said.
Baker agreed. “To be honest with you, it was always a good deal — it was always better than going the conventional route,” he said.