Loan Assumption Tactics & Strategies?

[Jordan Decuir]

Apparently ~60-65% of existing homeowners’ outstanding mortgage loans carry a rate at or below 4%. With new mortgage rates averaging above 7% per the Mortgage Bankers Association, I’d think that there should be opportunity to do deals by assuming those low-rate mortgages (if an investor can find the homeowner that desires to sell).

I’m not too familiar with the process of loan assumptions, so what are their pitfalls, risks, etc…?

I understand that FHA and VA loans are assumable, so what are the best strategies to find homeowners with assumable mortgages that want to sell? And what are the best tactics to convey to them the benefits of selling and allowing the purchaser to assume their existing mortgage?

Obviously this concept is pretty new for me, so please excuse if I’m not clear or if this is just a silly post.

[Marshall Leipprandt]

@Jordan Decuir Good thinking and I do think that there is some opportunity for those out there able to take advantage of assumptions.

I can only speak to the VA loan assumption as that is what I have researched the most being a Veteran and trying to use my VA loan again in the future. The main pitfall that I learned is that you are assuming the seller's current VA loan (monthly payment, total amount owed, and interest rate). Although it sounds super enticing, the VA loan is a 0% down loan product, but an assumption of a VA loan would put me in a situation where I could be having to but a significant amount down.

For example, if a seller has a current mortgage of $300K and interest rate of 3% from late 2020 or early 2021, that property may now be worth around $375K or more depending on the market. So in this case, I would have to bring that difference to the table at closing ($75K before closing costs) which decreases the whole primary advantage of the VA loan which is the 0% down feature. Granted the interest rate is still great, so if someone who has enough cash to go conventional and can assume a VA, then it obviously would make them quite happy. This same general principle would apply to the FHA as its a similar low-down option.

This is really just the first roadblock that I think a lot of folks run into. The next obvious ones would be, whose VA entitlement is being used if a mortgage is assumed? Are there options for non-VA eligible to assume VA? The list surely goes on, but I think we will start to see a lot of videos and articles on this topic and I think it could be a good strategy for sellers to offer in this market and for buyers to have their agents search the MLS for because rates under 4% could still be a long way off.