An Assumable Mortgage Is a Hack to Help You Lower Interest Rates — But How Does It Work?

With interest rates on the rise, many hopeful homeowners are looking for creative ways to make homeownership more affordable. Other than interest rate buydowns and larger down payments, there aren't too many ways to finagle a lower monthly payment. This is why many people are starting to consider purchasing a home using an assumable mortgage.

While assumable mortgages ‌do‌ offer borrowers a way to access the lower interest rates of yore, they're not a one-size-fits-all option. For more info on what every homebuyer needs to know about this buzzy term in the mortgage industry, here's what two mortgage pros told Hunker.

An assumable mortgage is a mortgage that lets incoming homebuyers take over the obligations of an existing mortgage from the seller, including the loan's balance, its mortgage rate, and its remaining term, according to Dan Green, president at Homebuyer.com, a mortgage company for first-time homebuyers. "The assumable mortgage feature is included standard on all FHA, VA, and USDA mortgages," he says.

Government loans aren't the only ones that have the option to be assumed by a property's new owner, according to Tony Grech, senior mortgage loan originator for CrossCountry Mortgage. "Government loans (FHA, VA, USDA) are the most commonly assumable, while only certain conventional loans are — most typically adjustable rate mortgages," he says.

In other words, not all types of mortgages are allowed to be an assumable mortgage.

Not everyone can take advantage of this type of deal, though. Green explains that borrowers hoping to assume the seller's mortgage will still need to qualify based on standard approval guidelines, including credit, income, and employment eligibility standards. As an added hurdle, the seller will also need to agree to the assumption, which would allow the seller to pass responsibility for their existing mortgage to the homebuyer.

Next, you'll have to get the current servicer on board as well. "The buyer needs to apply with the existing mortgage servicer to be able to assume the loan, and they must qualify just as if they were applying for a normal loan," Grech says. "If it's a VA loan, they have to be a qualified veteran. If it is FHA, they need to meet the minimum credit score requirements, debt-to-income guidelines, etcetera." There are also other qualifying factors, like keeping the home as your primary residence.

Sellers can definitely get a leg up if they're going this route because their home will have the benefit of being attached to a below-market interest rate. "A $400,000 mortgage with an assumable 4 percent mortgage rate costs 25 percent less monthly than a comparable 6 percent rate on the same home," Green explains.

While the long-term savings may be the biggest draw — rates are expected to hover around the 7 percent mark through the first quarter of 2023 — there can be some upfront savings as well. "Typically, an appraisal is not required," Grech says. "Lender fees such as origination charges and underwriting fees normally aren't charged."

The biggest downside to trying to close on a home with an assumable mortgage may be finding real estate pros who have experience with them. "It's been a falling mortgage rate environment for the last 20-plus years, so mortgage assumptions are rare," Green says. "Few real estate agents and lenders have recent experience with them."

Because assuming a mortgage adds a layer of complexity to buying a home, Green says they might not be as easy to find. "They're most likely to be accepted in a buyer's market, when demand for homes is soft," he says. "The ideal market for mortgage assumptions is when demand for homes is low and mortgage rates are high." The best way to find one for yourself is to ask whether a seller's mortgage is assumable and whether the seller is willing to negotiate the mortgage as part of a sale.

Another downside Grech points out is that they may not work if you're in a rush to get to the closing table. According to him, some assumptions can take 45 to 90 days, whereas a good mortgage lender can process a loan in three to four weeks in most cases. "Sometimes the buyer and seller need to wrap it up quicker and don't want to wait (or can't wait)," he says.

Another potential roadblock is that you may need to pony up a larger sum than a traditional mortgage would require. "The buyer can only finance what the seller owes on the mortgage," Grinch says. "So, for example, if someone bought a home with a $200,000 FHA mortgage a few years ago at a 4 percent interest rate and they want to sell the home for $250,000 now and owe $185,000 on the loan, the buyer needs to come up with a $65,000 down payment."

To put that in perspective, if that same buyer decided to buy that home using a traditional FHA mortgage, which only requires a minimum of 3.5 percent down, they would only need to come up with a $8,750 down payment.

Anytime something seems too good to be true, it's likely because it is. Grech says you'll need to get the full financial picture before agreeing to close with an assumable mortgage. "So, what I would say to buyers considering an assumable mortgage is: If you see a home listed for sale promoting an assumable mortgage, it may or may not be a good deal," he says. "Find out how much is owed on the loan, what rate it is at, and what type of loan it is." Once you have that information, you can compare it to the financing currently being offered and see if the terms of the existing loan will be a bigger benefit and if you can meet the larger down payment terms.

If all of that lines up, the seller is agreeable, and you can qualify through the servicer who holds the loan, assumable mortgages may just be the best way to get 2020 rates in 2023.