When Ellen Harper, a software architect in Atlanta, started looking for a home in 2021, home prices were already high. But she couldn't have predicted the rapid rise in her interest rate the following year, and even with a large down payment, her new math made her nervous.
But earlier this year, she encountered something like a portal to the not-so-distant past. It was a list of thousands of homes with low-interest mortgages that could be transferred from existing homeowners to new homebuyers. , also known as an assumable mortgage.
Harper, who is in her 50s, managed to snag one of these homes, a four-bedroom brick colonial in Fairburn, Georgia, with monthly payments of $1,400, and closed two weeks ago. did. This is an amount she can comfortably afford into her retirement, thanks in large part to the 2.49 percent mortgage rate. This is less than half the current rate of 7.09% for the most popular type of mortgage, a 30-year fixed loan.
“I didn't want to end up in a situation where I had a bad mortgage and all I could do was pay the mortgage,” Harper said. She found her home through Rohm, a startup that lists homes eligible for low-interest loans and assists buyers through the process. “There were other houses, but they were all nice and all were nice,” she added. “But I chose the lowest rate I could find.”
Assume that the mortgage is not some kind of contraption. This is a benefit built into certain government-backed mortgages, as long as the new owner qualifies. This process doesn't work for all prospective buyers, as there are several hurdles to clear before you can receive the keys, and it often includes a high down payment. For home sellers, advertising alongside marble countertops can attract more potential buyers.
Find a home loan you can take on
It was last popular in the 1980s when mortgage rates were over 18%, and many real estate professionals didn't even know it was possible to underwrite mortgages. But as mortgage rates continue to rise, rumors are spreading. Realtor.com, a home listing website, recently began tagging potential properties to make them searchable. And more companies, from small home-owned businesses to startups like ROHM, are seizing the opportunity to create lists and maps of eligible properties and save money to navigate the nerve-wracking process. billed to homeowners.
According to data firm Black Knight, an estimated 12.2 million loans, or 23% of all outstanding mortgages, are eligible, but most conventional mortgages (which make up the majority of existing loans) are excluded. . This is a feature built into mortgages backed by the Federal Housing Administration and is widely used by first-time homebuyers and Veterans Affairs homebuyers.
Although the number of completed prerequisites is only a small portion of total home sales, that number is increasing. More than 6,000 were completed in 2023, an increase of 139% from 2022. This year already he has completed 3,896 assumptions.
Many homeowners with low-interest loans probably aren't ready to let go of them. Nearly two-thirds of the mortgages available with interest rates below 4% were taken out within the past three-and-a-half years, Blacknight said.
When trying to take on a mortgage, several stars need to align. Because many homes are rapidly increasing in value and some of the assumed loan is being paid off, there can be a large difference between the purchase price and the remaining amount on the mortgage. That means potential homebuyers may need a larger down payment, or at least be able to qualify for a second mortgage with a much higher interest rate.
Another hurdle is finding sellers willing to take up such offers and ensuring that the mortgage servicer holding the loan (who is paid much less than for a typical new mortgage) in a timely manner. We hope that the company will handle this undertaking.
Several startups are trying to facilitate this process, including Roam, which recently received $3 million in investment led by venture capital firm Founders Fund and DoorDash CEO Tony Xu.
Roam operates a website similar to Zillow, but currently all listings in 18 cities in seven states have an assumed mortgage of less than 6%, enough to cover at least half of the purchase price. except for its scale.
The company works with real estate agents who are knowledgeable about the loans expected in the markets in which it operates. The transaction coordinator calls your mortgage servicer (the company that manages your loan) until the transaction is completed. Roam's support doesn't come cheap. The charge is 1% of the home's sale price, so for a $450,000 home, he would pay $4,500. The buyer only pays if the deal goes through.
In Harper's case, the seller and her listing agent were so skeptical that the broker submitted her five offers. That's when real estate agent Kevin Hosner of Atlanta's Chapman Hall Realtors got creative. They promised to pay the seller an additional $2,000 if the deal didn't close within 60 days. Rohm used this as inspiration for a new guarantee. If this assumption is not processed within her 45 days, the company will pro-rata the homeowner's mortgage until it is processed. Harper ultimately paid $357,000, including her down payment of about $170,000.
“Just because it's technically possible doesn't necessarily mean the seller is willing to do it,” Hosner said. “It’s not as quick as a cash offer that closes within two weeks.”
Hosner, a former church pastor, has completed dozens of potential deals and has a preacher's passion for spreading the word about their availability. However, not all agents want to be bothered with the extra headache, and many buyers run into problems with mortgage servicers and lenders handling prerequisites. Mortgage brokers say it can take 45 to 90 days or more to close on an assumable mortgage, but buying a home with a new mortgage typically takes 45 to 90 days or more in many parts of the country. It will take about 1 month to 45 days.
“Servicers are very reluctant to do this,” said Ted Tozer, nonresident fellow at the Urban Institute Housing Finance Policy Center. “They actually lose money every time they do it because it costs them a lot of money that they can’t cover with the rates they can charge.”
Both FHA and VA have caps on the amount that mortgage servicers can charge for an assumption.
run the numbers
For buyers, finding a low-interest mortgage may seem like a no-brainer. But there's a lot to consider, including the possibility of qualifying for a second mortgage, which can disrupt the closing process or void the deal altogether.
ROHM CEO Raunak Singh said uncertainty about being able to secure a second loan was a frequent hurdle, and some mortgage lenders with available loans said Collection agencies will extend additional loans, but this is not always the case. To address this issue, Roam recently began working with Spring EQ, a national lender. Spring EQ plans to offer his second loan to He Roam customers with a credit score of at least 640 and a down payment of at least 15 percent. “Now they can shop for any home without worry,” Singh added.
Imagine a $400,000 home with a $280,000 mortgage. Homebuyers would need to come up with $120,000 in cash or a loan to make up the difference. A buyer who made a 20% down payment, meaning he paid $80,000, would need an additional $40,000 plus closing costs.
The result of the calculation is: A homebuyer's total monthly payments would be $1,761, compared to $2,237 per month for a new mortgage with a 7.5% interest rate. That includes an assumed mortgage payment of $1,230 (at 3% interest) and a second loan of $336 (at 9.5% interest), according to Roehm's calculations.
Monthly payments include another ongoing cost. With FHA loans, homebuyers must also pay a $194 mortgage insurance premium. This is an FHA program fee to cover the lender's losses if the borrower defaults.
Mortgage insurance typically covers the risk of making a small down payment. But here, even borrowers with a large down payment will still have to pay a fee (perhaps 0.80% of the loan amount each year, paid in monthly installments) over the life of the loan, with some exceptions.
People with VA loans must pay the agency a one-time fee of 0.50% of the loan balance, but there are no ongoing insurance costs. However, there are other limitations as well. If a non-veteran buyer assumes the mortgage, the seller may lose all or part of its rights to another VA loan until the old VA loan is paid off.
Still, it's worth it for many prospective buyers.
Ryan Carrillo was one of many homeowners who wanted to move but didn't want to give up his 2.75% mortgage.
Once I learned that I could insure an FHA-insured mortgage, I decided to look for another mortgage. However, he soon became frustrated finding the expected list.
“I thought, 'We're now in a world where the underlying mortgage is worth more than the property. There has to be a way to do something about it,'” he said. .”
That led to an idea, which I shared via text with my entrepreneur friend Luis Ortiz. In August, the pair announced Assumable.io, a small, self-run business. The website currently features his 26,000 active listings, and he has given away $1,850 to help willing borrowers through the process Mr. Carrillo is beginning to help his family. I am billing. He and his wife, who welcomed their first child in January, are moving from Phoenix to Texas to be closer to relatives.
He has no intention of passing the mortgage on to the buyer. I'm worried it will take too long to complete given my impending move.
His assumed mortgage interest rate is 4.87, which would mean he would save more than $400 a month over a new loan at the quoted 7.12 percent.
“Assumables is a time machine to the low interest rates of the past,” he added. “Once you crunched the numbers, it was a no-brainer,” he added.