Would buying a home be more appealing if a buyer could sign up for a mortgage at 3%? A startup is working on helping home buyers finance a house by taking on the existing low mortgage rate of the property.
Frozen Housing Market
Mortgage rates have increased significantly in the last two years, rising to more than 7%. The decrease in affordability for buyers due to high financing costs has reduced demand in the housing market. The current substantial shortage of new listings can be credited to homeowners retaining their relatively low mortgage rates.
According to Redfin, approximately 62% of properties have a mortgage rate below 4%. If buyers could lock in a purchase at these low rates today, it would present a substantial cost savings opportunity.
Assumable Mortgages Could Be an Option
When selling their homes, borrowers typically utilize the proceeds to settle their outstanding mortgage balance. This is a common requirement in most loan agreements.
However, there are instances where certain mortgages, like those insured by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) allow homebuyers to “assume” the seller’s debt.
With an assumable mortgage, the buyer assumes the seller’s existing mortgage, maintaining the interest rate, payment schedule, and loan balance. This strategy can be advantageous while rates rise, allowing the borrower to secure a mortgage rate significantly lower than what they would qualify for with a new home loan.
Assumable mortgages have been a niche part of real estate investing but have yet to be used widely by homebuyers. Keep in mind, though, that not all home loans are assumable. Most conventional mortgages aren’t.
However, if specific requirements are met, FHA, VA, and USDA loans can be assumable. The seller must obtain lender approval for an assumable mortgage in the case of FHA and VA loans.
Although FHA loans have mortgage insurance premiums, the advantage for buyers is that FHA loans mandate a smaller down payment of 3.5%, making it an appealing and relatively affordable choice for first-time home buyers. Furthermore, FHA mortgages are deemed more accessible to buyers who do not have excellent credit scores.
.The borrower must meet the military service requirements when obtaining a VA loan. However, the new borrower is exempted from fulfilling military service requirements when assuming a VA loan. Consequently, non-veterans are eligible to assume a VA loan.
If a civilian assumes a VA loan, the veteran’s VA entitlement remains attached until the loan is paid off. However, if the seller’s VA entitlement stays stay bound to the original loan, it would prevent them from using it to buy another home until the previous loan is paid off.
On the other hand, if another qualified military buyer assumes the VA loan, the seller can take a new VA loan for their next home purchase.
Startup Offers a Solution
Assumable mortgages have always been part of the creative real estate financing strategies investors use. However, loan assumptions take time to execute. Several lenders have reservations about this concept due to the associated increase in workload and subsequent decrease in their payout.
Roam, aims to streamline the process, handling the necessary paperwork and bureaucratic formalities. By working directly with the seller’s mortgage company, Roam acts on behalf of both the buyer and seller, ensuring a smooth and efficient transaction.
The platform for purchasing a home with an assumable low-rate mortgage included officially launched its service in select markets of GA, AZ, CO, TX, and FL, with plans to expand to new markets soon.
Practical Challenges Loom
In theory, the assumable mortgage concept holds significant merit. That’s particularly true for prospective homebuyers who have become disheartened, as they have the potential to obtain a mortgage at a reduced interest rate.
In practice, lenders would prefer the house sold to a new buyer without assuming the mortgage. This enables them to recoup the below-market mortgage and issue a new mortgage to the buyer at the prevailing market rate of over 7%. In fact, some lenders delay processing assumption loans since they only receive a few hundred dollars, significantly less than what they would earn for originating a new mortgage.
The second challenge is for the buyers to come up with the difference between the original loan amount and the new sale price. Consider a property valued at $1,000,000 with an assumable mortgage balance of $600,000. Even after assuming the mortgage, the buyer must still provide $400,000 to make up the difference. If the cash down payment of $400,000 at closing is impossible, the seller must take out a second mortgage at prevailing interest rates.
Roam plans to facilitate lender recommendations for additional financing. The platform would also recommend homes with a loan-to-value ratio of at least 50%. That filters out $1,000,000 homes with only a $100,000 mortgage balance. Even with a second mortgage, the blended rate for the new home buyer should still be lower than the current mortgage rates.
“It’s not that home prices are too high; prices and interest rates are both high. If interest rates were at 5%, my clients could buy now,” says Jonathan Bird, CFP from Farnam Financial.
In return for its services, Roam charges buyers a fee equivalent to 1% of the purchase price in the form of closing costs. Current listings on the website indicate 567 homes in Atlanta, GA, and 811 homes in Tampa, FL.
Hopefully, assumable mortgages can help thaw the housing market.