What is an Assumable Mortgage? How they work & ways to close with a portable loan

[AJ Wong]

Hot investment topic alert: Assumable mortgages and purchasing properties with one. 

An assumable mortgage is effectively a 'portable' loan. Instead of applying for a new mortgage the buyer takes over the sellers existing mortgage loan. The buyer must come up with the difference between the seller(s) current mortgage balance and agreed upon sales price, plus closings costs. 

Why would buyer(s) want to take over a seller(s) mortgage? 

- Lower rates. The majority of US homeowners (purchased or owned before 2023) have very low mortgage rates in the 3%+/- range. This has contributed to lower inventory as sellers are hesitant to walk away from their historically mortgage costs, but the start of the pandemic era rates is now four years ago (2020) and life events often eventually force property sales. A major incentive for sellers (and buyers) is an assumable mortgage often at nearly half current mortgage interest rates. 

- Shorter duration and term. Often overlooked as a benefit of assuming a fixed rate mortgage is that most fully amortized loans in the US are front loaded. Meaning the first payments are majority interest and with each subsequent payment the proportion of principal paid increases. So that by the end of the amortization schedule, almost the entirety of the monthly mortgage payment goes directly to pay principal. An assumed mortgage that is 2-3-4 years into the payment schedule, has the additional incentive of a greater percentage of their initial payments paying down a greater principal portion. 

What are the hurdles to assumable loans for buyers?

- Insufficient down payment. Most properties have gained considerable value since their acquisition or refinance. For those homeowners that have been in their properties more than 5-10-20 years, in all likelihood they have a low existing mortgage balance in comparison to the proposed sales price. For example a buyer of a $500k home with an assumable (existing) mortgage balance of $225k would need cash to close of $275k plus closings costs. Seller concessions and other creative capital solutions are generally not available, assuming a loan is effectively transferring the existing loan to the new buyer once the balance (cash portion) has been satisfied at closing. 

- Income deficiency. From my experience it is primarily conventional, FHA or VA loans that can be assumed. I don't believe a DSCR lender would transfer the obligation to a new borrower but please correct me if I am wrong..In general, it will be be a full income verification or full documentation application with the current lender directly and no other mortgage professional would be involved. So expect full DTI (debt to income ratios) to be calculated.

Workarounds:

- Not all assumable mortgages with be at such a low LTV (loan to value) there are examples of properties that require 15-20-30% down. One way to capitalize the down payment could be leveraging another property with a HELOC (home equity line of credit) or fixed second rate mortgage. The blended rate of interest and payments is likely to be significantly lower than financing the entire purchase with a new mortgage balance at current conventional or Non-QM mortgage rates. There are several attractive fixed rate second position cash out options, many with online processes and no appraisal requirements (smaller balances and low LTV's) and fully underwritten options offering up to $500k+ cash out at Prime rate plus 1-2-3% depending on the properties type. Investment property equity lines and second mortgages are out there but generally also require full income verification (including rents.)

- Speaking of HELOC's and second mortgage another option could be a simultaneously closing. If the existing mortgage holder (the note being assumed) will allow subordinate financing or a second lien position, it's possible to borrow part of the down payment difference and close both loans at closing. So in our previous example: $500k purchase, $225k assumable mortgage..the lender might allow the qualified buyer to take over the $225k put $100k down in cash and obtain a second loan for $175k from another lender. If it's a primary residence the total loans of $400k (1st + 2nd) equals 80% CLTV (combined loan to value) of the purchase price. In all likelihood for this to be permissible they might want a bit more down for a lower loan to value (LTV) and the borrower will need to qualify based on both proposed payments.

A prudent step for sellers prior to listing would be to verify with their lender whether the mortgage note is assumable (transferrable) to a new party. For buyers or their brokers with well capitalized investors, inquiring directly for verification of a property whether it has an assumable note is good practice while interest rates remain elevated. 

Also have your rep check private MLS notes as it might not be made public. For Realtors, most MLS's also offer an assumable search (for those that are identified correctly) when noted investors can find this information on additional details at the bottom of real estate sites like Zillow and Realtor.com under 'Terms' usually it will say conventional, cash, assumable...Title companies can be helpful with verifying the original loan balance and original note date which is a good indicator of the sellers note rate and how much principal they've paid down based on an ordinary amortization schedule.

A recent example listing was a northern OR Coast property asking $650kish they have an assumable VA loan with a $400k balance at 2.75%! The seller is willing to abandon their VA eligibility so that a new buyer does not need to be a Veteran, but does need to qualify based off of full income documentation and have $250K+/- plus closings costs.

Have you invested in a property with an assumable mortgage note? How was the process?