Assumable mortgages are all the rage on Tik Tok...but are they real?
With rates on an upward spiral since mid-2022, assumable mortgages are being touted by "financial gurus" all over social media. But can you really get a 3% rate in 2024? Yes, if you're lucky.
Once rates surpassed 3%, 4%, 5% and even 6% in a whirlwind couple of months in mid-2022, the housing market was left reeling. Mortgage applications were down over 100%, deals were blowing up, buyers slammed on the brakes and ran back to their apartments (where many still are today). As a potential buyer, your mortgage went up by hundreds, even over a thousand dollars a month (especially in Staten Island) in just a few months time- a very hard pill to swallow. So what happened? As it usually does, people dug in to figure out how to dig out. They chose assumable mortgages as their vehicle, and now every influencer on Tik Tok is screaming about them from the rooftops. But they're a lot more difficult than you think. Let's dig in.
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Quick Recap
#1: What is an Assumable Mortgage?
This is a vehicle that can lead you into a 3% mortgage rate in a world of 7%.
The concept of assumable mortgages presents a potential goldmine for countless homebuyers aiming to dodge the bullet of skyrocketing interest rates by inheriting the more favorable rates of existing mortgages. This opportunity, theoretically, is like striking gold in today's market. Assumable mortgages are special types of loans, primarily allowed on those backed by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), designed with a unique feature: they can be transferred directly from the seller to the buyer. This means that even amidst a market dominated by 7% interest rates, a lucky buyer could secure a mortgage at an astonishingly low rate of 3% by simply taking over the current homeowners loan.
In an era where interest rates are on the rise, the concept of assuming an existing mortgage has gained popularity as an innovative way to make homeownership more accessible and affordable. However, the journey to assume a mortgage is not without its hurdles- afterall, nothing is ever as easy it seems, right?!
#2: Issues with Assumable Mortgages
So... it can't be too easy, right? If it was, the whole world would be assuming mortgages and there would be no 7% rates left (bad thing?)
Many who have ventured down this path report significant delays and inefficiencies caused by the loan servicers handling these assumptions, often resulting in long waits and, in some cases, outright rejection of applications.
This bottleneck is particularly frustrating when compared to the process of securing new mortgages, where lenders seem to move mountains to ensure swift closure. The underlying issue is economic; servicing an assumable mortgage simply isn’t as profitable for mortgage companies as issuing a new loan is.
From Wall Street Journal:
Robert Carelli was thrilled when his offer to buy a house in Alexandria, Va., was accepted in late 2022. The seller agreed to let him take over the VA mortgage with a rate of just over 2%. Carelli and his family were preparing to move from Connecticut.
Mr. Cooper Group, the servicer, took four months to tell him he didn’t qualify, he said. The company told him the debt he was taking on was too high relative to his income. The calculation omitted his wife’s salary because she was starting a new job.
In a nutshell, mortgage firms only rake in a couple hundred bucks for each mortgage assumption they handle, which is peanuts compared to the cash they'd pocket from originating new loans. Plus, this fee often doesn't even cover the costs they incur to process these assumptions.
In response to this imbalance, the Mortgage Bankers Association, a key industry body, lobbed a request over to the FHA and VA back in late 2022. They were aiming to bump up the ceiling on assumption fees to a more reasonable $3,500, hoping to better balance the scales for the effort involved. Yet, as it stands, no moves have been made to adjust these caps.
Even if you find someone to process it in a timely fashion and move it all along... the journey STILL isn't without its hurdles. For some potential homeowners, assuming a mortgage is simply financially out of reach. This is because the buyer needs to cough up the cash to bridge the gap between the selling price of the house and the outstanding balance on the mortgage. Especially in today's market, where home values have been on a tear, this gap can stretch into the hundreds of thousands of dollars, putting a significant financial strain on buyers.
#3: Alternatives to Assumable Mortgages
In light of these challenges, it's crucial to explore alternatives to assumable mortgages that can help ease the burden of high interest rates.
One such option is the strategy of rate buydowns, where upfront payments can reduce the interest rate. This method can significantly lower monthly payments, offering a reprieve to homebuyers during those crucial first years- but it does cost money.
Another avenue is adjustable rate mortgages (ARMs), which, despite their recent shortcomings, can still be a viable choice for some. ARMs typically offer lower interest rates than fixed rate mortgages for a set initial period, after which the rates adjust according to market trends. For buyers who plan to move or refinance before the adjustable period ends, ARMs could present a cost effective solution.
Additionally, exploring government backed loan programs like FHA, VA, or USDA loans can offer more favorable terms, including lower down payments and interest rates, compared to conventional mortgages. Each of these programs is designed with specific eligibility criteria in mind, making it essential for buyers to research and understand which option best aligns with their circumstances.
Lastly, creative financing options such as lease to own agreements or seller financing might provide unique pathways to homeownership for those struggling to navigate the current market. These alternatives require careful negotiation and a clear understanding of the terms, but they can offer mutually beneficial solutions for buyers and sellers alike.
In navigating the complexities of today's housing market, understanding and considering a broad spectrum of financing options can empower homebuyers to make informed decisions, ultimately leading them closer to achieving their dream of homeownership amidst challenging economic conditions. And I'm here to ride this wave with you, should you be ready to go!
I, Joseph Ranola, am an Associate Broker at Matias Real Estate, located at 418 Port Richmond Avenue.