But rates don’t appear to be coming down any time soon. So, how is this possible?
Ashley Kehr:
What if I told you that right now today you can buy a property and inherit a 3% mortgage rate, even though rates are hovering around 6.5%? Trust me, this is not a loophole. This is not sketchy. It is a feature that is actually built into millions of existing homes, loans, and almost nobody talks about it. Today, Tony and I are going to break down everything you need to know about assumable mortgages, what they are, how to find them, and exactly how the process works.
Tony Robinson:
Now, here’s a quick stat to set the stage. There are roughly six million homes in the US right now with assumable mortgages at rates below 5%. That is not a small number. And here’s the craziest part. Most sellers don’t even know that their mortgage can be transferred. So this is genuinely an edge for any Ricky who learns this.
Ashley Kehr:
This is the Real Estate Rookie Podcast, and I’m Ashley Kerr.
Tony Robinson:
And I’m Tony J. Robinson. And with that, let’s get into assumable mortgages.
Ashley Kehr:
So I was actually at a real estate meetup, believe it or not, where I talked to somebody who just did this strategy and it has just been so interesting to me to learn more and more about it. So we wanted to share it with you guys on today’s episode and that is assumable mortgages. So let’s start from zero, what an assumable mortgage is. So imagine that somebody bought a house in 2021 and their interest rate is at 2.75%. They’ve been paying it on it for five years, but now they want to sell. So normally when a house sells, the seller pays off their old mortgage and the buyer takes out a brand new one at today’s rates. Today’s rate’s around 6.5% as of the recording of this. But with an assumable mortgage, the buyer can actually instead step in and take over the existing loan on this property.
Same lender, same interest rate, same remaining balance, same term. You’re literally just taking over their mortgage instead of going and getting a different mortgage. Your rate doesn’t reset to today’s rate. The clock doesn’t start over on the amortization. You inherit exactly where they left off. So less closing costs to actually get, you’ll still have to pay for title and things like that, but to actually closing on a brand new loan, less payments that you’ll need to bring to the closing table too.
Tony Robinson:
So let’s look at some real numbers on this. On a $400,000 purchase price, or let’s say that’s a loan balance, the difference between a 3% interest rate and about a six and a half interest rate that we’re seeing today is almost $900 per month. That’s almost $12,000 per year. And over the life of the loan, you’re talking about a few hundred thousand dollars in interest savings, and that’s not a small number. So if you are a real estate investor thinking about cashflow, saving $900 per month on a mortgage payment on a rental property is massive. That could be the difference between a deal that bleeds money and one that actually produces positive cashflow.
Ashley Kehr:
I do want to clarify one thing here because this is similar to an other strategy that has been talked about and that is sub two. So sub two deals kind of do a similar thing where you’re taking over the existing mortgage. The difference here with the assumable loans, you’re actually getting the bank’s permission, the lender’s permission to actually transfer it into your name. With sub two, you’re taking over the mortgage and making the payments on the mortgage, but the mortgage is not going into your name. And in a sense, you’re not notifying the lender of this change in sale of the property in that you are now the mortgage holder. So this is how assumable is different than doing sub two. Sub two deals obviously can be done with assumable mortgages and the same kind of strategy applied, but assumable, you’re going to the lender, you’re getting permission and you’re going to actually have your name on the loan.
So your debts to income will be affected and they also will vet you, which will get into more as to what criteria you’ll need to have to actually assume one of these loans also. Okay, which loans are actually assumable? And typically there are three different ones and here’s the simple version. They’re government-backed loans. So conventional loans are almost never assumable. So this is your FHA loan, your VA loan and your USDA loan. These are government-backed loans mortgages that often have it written into the mortgages that they are assumable. With these three types of loans for the USDA loan, it is important to remember for it to be assumable, it has to be your primary residence. FHA and VA loan, they do not. So if this is an investment property, you want to focus on finding properties with those two types of loans. All
Tony Robinson:
Right, so let’s break down each of these loan types. So first you have FHA. These are very common with first-time home buyers because of the low down payment requirement. You can get as low as 3.5% on an FHA loan and all FHA loans are assumable as long as you qualify. Now, in order to qualify, you need at least a 580 credit score and your debt to income ratio needs to stay under about 50%. Now there is one cash. FHA loans after, I believe it was 2013, require mortgage insurance for the life of the loan. So you have to factor that cost in. But again, if we’re talking about trading a 7% interest rate for a 3% interest rate, I’ll pay the PMI.
Ashley Kehr:
The next is a VA loan. So I want to make this very clear because this can be a huge common misconception that in order to assume a VA loan, you don’t need to be a veteran. So you don’t have to have any military experience to be able to assume a VA loan. You do to have to start a VA loan from start to scratch to purchase a property to get a VA loan, but to assume it, you do not need to be a veteran to actually assume the loan. So any qualified buyer that meets their criteria, their lender credit and income requirements can actually assume one of these loans. The one thing that the seller does need to be aware of though, and as a person and have some moral compass, if they’re not aware of these different things, it should tell them that if a non-veteran assumes their VA loan, their VA benefit stays tied up until that loan is paid off or refinance.
So in this scenario, let’s say I go and buy a property, I get a VA loan and Tony’s going to buy it from me. When Tony assumes that loan, the mortgage goes into his name, but I now still have that VA benefit tied up. And in some areas you have a certain set limit of how much you can get for a VA loan. So you could possibly have two VA loans at a time as long as you’re under a threshold of let’s say 500,000 or maybe you’ve met your threshold in your area so you can only have one VA loan at a time and that means they won’t be able to go out and buy a new property with a VA loan. So I think that’s something important to disclose if you are being buying a VA loan from somebody and this would cap their threshold and they wouldn’t be able to use that again for another property.
All
Tony Robinson:
Right. So the next type of loan is a USDA loan and USDA stands for United States Department of Agriculture. So think like farm, rural agriculture. These are assumable, but the requirement here is that you have to use the property as your primary residence. Now I’m assuming it’s because a lot of folks, when they’re using USDA, it’s because they’re buying farmland and that’s a big part of the push behind USDA. So if you are using this loan, it is assumable, but it’s got to be your primary residence. So this will work well in a house hacking type of situation or maybe even if you’re doing like if you want to buy a farm or something to that effect, these loans will work really well.
Ashley Kehr:
Okay. So let’s quickly go through the criteria so you can get a picture of if you’d even qualify to assume one of these loans. So FHA, 580 plus credit score on an FHA loan. VA loan, you need to have a 620 plus credit score. Some lenders will accept 550 depending on what your other criteria is. Just remember, non-veterans can actually get asumed the loan. You don’t have to be a veteran. And then for USDA, we talked about it has to be an owner occupied, can’t be used for investment properties only. And for that, you need a 640 credit score. And then conventional almost never actually goes through. They have a due on sale clause that actually blocks assumptions and that is why a lot of people do sub two on conventional deals.
Tony Robinson:
So let’s talk about maybe the thing that we haven’t discussed yet, but it’s incredibly important, but it’s the equity gap. So we’ll talk about what that means and how you as the buyer can actually get around this or how you should be accounting for this. And we’ll cover the equity gap as soon as we get back from a quick word from today’s show sponsors. All right guys, welcome back. So we talked about the different types of loans that are assumable, what it actually means to assume a loan, but let’s talk about the equity gap because this is a concept that a lot of folks get confused on, but it’s where a deal might fall apart if you don’t run the math correctly. So the equity gap is when you assume a mortgage, you’re taking over the remaining loan balance, not the purchase price of the home.
And those two numbers are very different. Again, the purchase price and the remaining loan balance.
Ashley Kehr:
So let’s say that a seller bought their house in 2021 for 350,000. They put 5% down and they got a VA loan at 2.5 or 2.75%. We’re going to use in this example. A lot of times with VA, you can do 0% down, but five years of payments and home appreciation later, let’s say the house is worth 450,000 and the remaining loan balance is around 320,000. You are buying the house for 450,000 and you assume the loan at 320,000. So that leaves a gap of $130,000. So this is what they call the equity gap and this is where you need to bring capital or find a way to cover that $130,000 somehow. So let’s get into how to actually cover that gap.
Tony Robinson:
Yeah. So option one is the simplest option is just bringing the cash. So you just bring $130,000 to closing. That is the simplest path, but clearly it means you’ve got to have the cash which isn’t accessible to everyone.
Ashley Kehr:
Option two is actually getting a second mortgage. You assume the low rate first mortgage and take out a separate second mortgage to cover the gap. This is the most complex, but it is how a lot of assumptions actually get done. The key is to calculate your blended rate. So the average across both loans, even if your second loan is at eight or 9%, your blended rate of them combined comes out to maybe four and a half to 5%, but you need to make sure your property is being going to be able to cover both of those payments too. And a lot of times lenders restrict getting a second mortgage on a property, but there are options out there.
Tony Robinson:
And then option three is seller financing. Some motivated sellers will carry a portion of that equity as a private loan, meaning you pay them back directly over time. This is especially worth asking about on homes that have been sitting on the market for a while.
Ashley Kehr:
Okay. Now the sweet spot. The best assumptions are properties where the equity gap is actually manageable. That usually means sellers who bought in 2020, 2021 or 2022 where they have that great interest rate. But maybe they didn’t put a lot of money down and are in markets where the appreciation is moderate, where there’s not a lot of growth right now. Maybe they don’t have a lot of that gap, a lot of equity built into the property. So the longer someone has owned and the hotter the market, the bigger the gap you’re actually going to have.
Tony Robinson:
If you’re running the math and the blended rate comes out to 6% or higher, the savings start to shrink and the added complexity may not be worth it. So use the blended rate as your gut check and it might even be beneficial to start reaching out to those lenders who will take that second lien position before you get too far down the rabbit hole of doing all this work because if you can lock someone in and you already know what their rate is on that second mortgage, now you can do that math more effectively upfront to understand what that blended rate might be as you’re shopping for some of these assumable loans. So now that we talked about all these other elements, let’s talk about how to actually find these listings. And Ashley and I were talking before we recorded and she like blew my mind with some of the stuff that she found on her side.
So I’m excited to share this with you guys. But 98% of people, even the sellers, don’t know that their mortgages are actually assumable. So that’s where the problem is. So you will almost never find the listing on Zillow that has been properly tagged as assumable. The seller doesn’t know it. The agent often doesn’t know it. And so nobody’s putting it into the listing, but this actually creates an opportunity. If you know how to find these properties, then you have an edge over almost every other buyer.
Ashley Kehr:
So let’s go through the step-by-step process of how to actually get this deal done of assuming a property. So first you need to find a property with an assumable loan. So there’s different platforms that you can actually use that tell you this information. And one is rome.com. Another is assumelist.com. And these are websites that specifically look for these properties with assumable loans on them. You can also use different resources like PropStream and you can filter. Sometimes they’ll have that information and that data if a property is a VA loan or an FHA loan.
Tony Robinson:
So then step two is to confirm assumability with your actual servicer. Now, the seller cannot give you details directly due to privacy laws. The seller has to initiate the request with their servicer first to confirm the loan is assumable, get the current balance and authorize a process to start.
Ashley Kehr:
And step three is you make your offer with the assumable loan built in. So you’re going to include an assumption contingency in the offer. So this is saying that you will purchase the property if it’s contingent on you actually assuming the loan. So this means that their lender will approve you to actually take over the loan. So that way, if you don’t get approved, you have that option to be able to back out of the deal.
Tony Robinson:
And then step number four is to apply with the servicer directly. Unlike a normal mortgage where you shop lenders, here you’re going to apply directly with the seller’s existing servicers since they hold the debt. So you don’t get to choose who you work with. You’re just bringing your full financial package, pay stubs, tax returns, bank statements, credit pull, the whole thing, and you’re taking it to that servicer. So it looks very similar to a new mortgage application.
Ashley Kehr:
Then step five, underwriting and approval. So this is where they’re going to look at you. They should have all the information they need on the property. They could request a new appraisal in some circumstances to make sure that the property hasn’t become super dilapidated and actually isn’t worth that. But most of the time that doesn’t happen. It is just they look at you and they qualify you. It can take 45 days to actually do this process to approve you, but sometimes it could take up to 60 to 90 days. So just make sure you’re putting that into your contract too. That closing may take a little bit longer if you’re in a state where maybe it moves faster. New York, this is typical anyways, so not really a big deal.
Tony Robinson:
And then step six is actually closed. So at closing, you sign the assumption documents, the seller is officially released from the mortgage and you take over as the borrower. So the transfer is a pretty normal process. The mortgage now shows on your credit report just like any other home loan. Now one big thing to call out, and this is actually a good point for a lot of you guys that are listening, is that the closing costs on the assumable mortgages are oftentimes cheaper than a new mortgage. For FHA, the assumption fee is up to $1,800. For a VA loan, it’s 0.5% of the remaining loan balance plus some small processing fees, usually a couple hundred bucks there. You compare that to the two to sometimes 3% that you might get on closing costs for usual transaction and you’re saving quite a bit here.
Ashley Kehr:
We’re going to take a short break, but when we come back, we’re going to talk about some of the pitfalls and cons of actually doing an assumable loan. We’ll be right back. Okay, welcome back. So yes, this sounds great. This sounds exciting, but we wouldn’t be doing our due diligence if we didn’t warn you of some things to be cautious of when actually doing an assumable loan. So the first is just this proces can be slow and painful and frustrating. So just make sure you’re baking that into your contingency, into your contract that you have the time to actually go through this process because it can be a slow and painful process, but worth it in the long run if you are able to get that lower interest rate to assume their loan.
Tony Robinson:
One borrower profile by MPR was sold that there were 1,500 people ahead of him and his servicers assume assumption processing queue and he didn’t hear anything back for months. So just to give you guys some context, this is not for the faint of heart, but the good deals are usually sometimes the hardest ones to get. So if you can stick it through, have the right mindset going into it, that’s how you find the good deals.
Ashley Kehr:
And just continuously follow up, follow up, follow up, follow up ask if they need anything, not saying, “Hey, what’s going on with my loan? Give me an update.” It could be just be more like, this is what I usually do is, “Hey, just want to check in if you needed anything from me. ” Flipping a little mindset that I’m holding them up, let me know what I need to give us to this, not holding it up anymore, even though it’s usually the other way around that they’re waiting to do something.
Tony Robinson:
For sure. And sometimes you just got to stay in control over your own loan. I just did a HELOC on my primary residence and luckily I’ve gone through this transaction enough times where I was talking with the transaction coordinator at the credit union where I got the line of credit from and she was just super slow getting the information back from escrow. And I saw the escrow company in one of the email threads she sent me. I just called them myself and I said, “Hey, here’s what I’m waiting on. What do you need?” And within a day I was able to solve what they were waiting on. Whereas before we have this person in the middle that was extending everything. So be in the driver’s seat, but it’s important to know. Now the other piece here is we’ve mentioned this before, but just to reiterate, the USDA loan is off limits for investors.
So we just want to say this clearly, if you are assuming a USDA loan, it has to be your primary residence. This is not a rental property play, right? Six to the FHA or VA loan if you’re looking for an investment property.
Ashley Kehr:
Okay. So the next thing is to actually check your math before you fall in love or get excited about an assumable loan. So even though the headline is exciting that you could get this low rate, make sure you actually run the numbers on the deal and don’t get too focused. And how are you going to fill the gap? What does that blended rate look like? Where is that capital coming from? Is it a line of credit? Is it cash? And make sure the numbers still pencil out that even if you’re putting in a large capital infusion of money, what is your cash on cash return going to be on the property? So don’t get too focused on just what the low interest rate is and what the monthly payment is going to be just for that assumable loan.
Tony Robinson:
All right guys, we covered a lot in today’s episode and hopefully you got some insight into not only what an assumable mortgage is, but the power behind it, why it’s so beneficial and how to hopefully go find your first one. So let’s just quickly recap what we’ve discussed so far. So first, an assumable mortgage lets you take over a seller’s existing loan at their original rates, balance and terms. Only FHA, VA and USCA loans are assumable, conventional loans almost never are. And there are millions and millions and millions of homes in the US right now with assumable mortgages below 5% and most sellers don’t even know that they have this. This is your edge. You do have to make sure you account for the equity gap. That’s the main challenge. You got to run the blended math on your rate and then the sweet spot of sellers who bought recently but don’t have a ton of equity built up, guys.
The process can take a long time to make sure you build in your patients. But if you guys can do all of those things, then you’re setting yourself up in a really strong position to hopefully find and close on an assumable mortgage at a really low rate.
Ashley Kehr:
And let’s start with where to find those deals. You can go to roam.com, assume list or assumable.io or just start when you’re looking at properties, you’re asking the agents, you’re asking the seller what type of loan that they have on the property and just trying to find out the information that way. Next, you can work with a real estate agent that actually has the knowledge of doing an assumption. Ask them if they’ve ever worked with somebody to figure out this process to negotiate that, especially if a seller is not even aware that this can be done for a property. If you’re going ahead and you have an agent that you work with that is already knowledgeable about assuming a loan, then they can help facilitate that conversation with the seller and be knowledgeable because that’s one thing I don’t like sometimes about negotiating a deal with an agent is that they’re really the middleman and they really need to understand, especially seller finance, things like that, they need to understand how it works for them to properly negotiate that for you inside of the deal.
Tony Robinson:
So one challenge for all of you that are listening, take what you’ve learned in today’s episode and just go out there and try and start searching on these different tools that we presented with you or to you to see if you can find anything. And if you do find something, start having that conversation. I was looking at some of these websites where we were on here and you’ve got to sign up for some Rome, you’ve got to create a profile, but there’s houses listed, assume list, same thing. Just go out there and start talking to folks. Call the folks that have these listings and just ask questions. And the more you ask, the more knowledge you gain, the more confidence you build. And hopefully you’ll get to a point where, man, I’ve talked to five or six different agents. I think I got a good sense here.
Let me try and submit an offer on one of these and we’ll see what happens.
Ashley Kehr:
Well, thank you guys so much for listening to this week’s episode of Real Estate Rookie. If you’ve done an assumable loan, maybe you’ve sold a property with it or you’ve bought one comment below, tell us about the deal and how it worked out for you. I’m Ashley. He’s Tony. I’ll se you guys on the next episode of Real Estate Ricky.
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