Using Assumable Mortgages to Navigate Higher Interest Rates

If you’re thinking about buying a home and it’s been a bit since you’ve checked the latest mortgage interest rates, you might want to make sure that you’re reading this sitting down. 2021 had the lowest rates ever, but 2022 has seen those rates steadily climb. In fact, they’re more than double what they were this time last year.

Currently, the average interest rate on a 30-year fixed mortgage is 6.98%, and there’s every indication that the Federal Reserve is poised to hike things even higher. Naturally, when mortgage interest rates rise, buyers struggle to afford their dream homes – and they end up paying much more over the life of their loans.

Wouldn’t it be nice if you could buy a house and keep the same favorable terms on the mortgage that the previous owners enjoyed? Well, that might just be possible with an assumable mortgage.

What’s an Assumable Mortgage?

An assumable mortgage lets a buyer “step into the shoes” of a property’s prior owner. In other words, the buyer not only takes over the house, but they also take over (or “assume”) the prior owner’s mortgage. Assumable mortgages used to be much more common in the past, but a fairly competitive housing market and stable interest rates made them less popular in recent decades.

Today, of course, the housing market has grown increasingly volatile. Sellers are now scrambling to work out deals with potential buyers so they can offload their real estate in a timely fashion – while buyers are doing everything in their power to maximize what they get for their dollars and minimize their interest rates – so assumable mortgages are experiencing a resurgence. 

When a buyer assumes a mortgage, they become responsible for whatever principal balance remains on the home, the existing repayment period, the monthly mortgage payment, the current interest rate on that mortgage and all other aspects of the loan, instead of getting a brand new mortgage. Sellers get a release of liability and can, in essence, take their money and run.

Are All Mortgages Assumable?

Typically, conventional mortgages – the kind that go through a regular bank – are not assumable (although it never hurts to check with a lender or review the terms of a loan for an assumption clause to be certain). If you’re hoping to find an assumable mortgage, you generally have to look for a home that’s currently secured through a VA loan, a USDA loan or an FHA loan.

Then, you have to make sure that you meet the qualifications imposed by whichever lender is involved before you can assume the mortgage. In brief, that means:

• VA Loans: You don’t have to be a veteran or active military to assume a VA loan, but you do need a 620 credit score and a 41% debt-to-income ratio. Unless you meet one of their exemptions, you’ll also have to pay a VA funding fee that’s equal to 0.5% of the loan, which can be significant.
• USDA Loans: You need a minimum credit score of 580 (although many lenders will want you to have a 620 or higher), and your household income cannot exceed 115% of the average median income for your area. Plus, the mortgage payment cannot exceed 29% of your monthly income, nor may your debts eat up more than 41% of your monthly earnings.
• FHA Loans: You can assume any FHA loan as long as you meet the FHA’s standard for creditworthiness. That usually means a credit score of 580 or higher and a 3.5% down payment (although lower scores are allowed if you can plunk down 10%, instead).

It’s also not uncommon for even conventional mortgages to be assumed when a couple divorces and one party is awarded sole possession of the property or when a family member dies and the heirs want to take over the mortgage payments.

Are There Any Pros and Cons to Assumable Mortgages?

There are pros and cons to just about everything in life, and assumable mortgages are no different. Probably the biggest “con” you will find to an assumable mortgage is the fact that you do have to buy out the seller’s equity. 

That may not be as difficult as it sounds, however. For example, if a seller bought their home with an FHA loan a couple years ago with a minimum 3.5% down and now needs to sell, they may not have much equity beyond what they put into it at closing. If you were already prepared to make a hefty downpayment on a home, you may not struggle at all to pay the seller what they’re due.

The other big “con” to an assumable mortgage for the buyer is the fact that they’re stuck with the prior owner’s lender – and you may or may not like working with them. For FHA loans, that also means being stuck with mortgage insurance payments that could partially negate the benefits of scoring a lower interest rate. 

Even so, it’s important to remember that you can eventually refinance the mortgage you assume once interest rates go back down to a comfortable level, and that means that even these drawbacks don’t have to last forever.

The advantages in this equation with assumable mortgages often outweigh the disadvantages by far. Aside from what we’ve already mentioned, buyers can often save on closing costs, they typically don’t need an appraisal (which saves money) and closing can be fast and easy. That also benefits sellers – who may find their homes extraordinarily more appealing to would-be buyers. 

The long and the short of it is this: There are plenty of ways to secure a favorable deal on a home, even when interest rates are soaring. Talking with a mortgage expert can help you better understand your options.