As mortgage rates continue their upward climb after reaching highs not seen in more than 20 years, another trend not seen in decades has reemerged: More buyers are looking to assume a seller's loan in order to avoid today's interest rates.
An assumable mortgage allows homebuyers to take over a seller's existing mortgage rather than applying for a new one, thereby allowing them to take over the terms, including the interest rate. These transactions were popular in the 1970s and 80s, and now with current mortgage rates hovering around 8% and millions of homeowners locked in at rates much lower, assuming a seller's loan is becoming more attractive again.
The option is not available for conventional loans, but mortgages backed by government agencies including the Veterans Administration (VA), United States Department of Agriculture (USDA) and Federal Housing Administration (FHA) have assumable functions, and make up roughly 22% of active mortgages, according to a recent report from The Wall Street Journal.
That's a sizable chunk, and some realtors are now pushing assumable loans as a solution for potential buyers who cannot afford a home at today's elevated prices.
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Christopher Tapia is a real estate agent for Compass in Florida, and says for months he has been actively encouraging buyers to look for homes whose sellers have assumable loans, because he says it is often the only way lower or middle-income families can achieve the American dream in this market.
"Today, in this era, we have to think outside the box," Tapia told FOX Business, pointing to the ongoing lack of inventory, high home prices and rising mortgage rates that have led to an affordability crisis. "So I thought to myself, what is the other alternative? What can we do? And once I continued to read about assumability, that's when I stepped in and started letting everybody know about it, because that's basically the only way" some people will be able to buy a home.
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Chris Birk, vice president of mortgage insight at Veterans United Home Loans, acknowledged mortgage assumptions are gaining more attention these days.
A Veterans United analysis of Ginnie Mae data through June indicates three-quarters of VA homeowners currently have a mortgage rate below 4%, making the assumption of those loans an attractive option – and more sellers are advertising assumptions in their home listings, according to the company.
"The ability to assume a loan didn’t mean much when interest rates were at modern-day lows," Birk told FOX Business. "But in today’s higher-rate environment, the chance to lock in an ultra-low rate can benefit both would-be buyers and Veteran home sellers."
Although assumable loans can be a great solution for both buyers and sellers, Tapia says sometimes the numbers do not work for buyers. Birk cautioned that VA loan holders allowing a non-Veteran to assume their VA loan can affect the seller's ability to have a future VA loan.
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"Some homeowners decide that’s a risk worth taking," he said. "While others ultimately choose a more traditional home sale once they learn about the potential downsides of an assumption."
