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A Rental Investor's Guide to Assumable Mortgages

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2024-07-05

An assumable mortgage allows a buyer to take over an existing mortgage. This approach could be a great way to obtain a property, sometimes with a lower interest rate than you’d be able to secure otherwise. 

But despite the growing interest in assumable mortgages, there’s a reason why they’ve been called the unicorn of home-buying transactions. They can be hard to find, and not everyone qualifies for one. 

Additionally, some of these mortgages may come with occupancy requirements which could mean that investors may not even be able to invest in them for use as a rental property in the first place.

So is it worth the effort? That depends! With the right approach and careful planning, investors can tap into the potential of assumable mortgages. But they’re not right for everyone. In this article, we’ll uncover more about how assumable mortgages work, and highlight what it takes to qualify for one. We’ll also share how you can go about finding these unique opportunities.

What Is an Assumable Mortgage?

An assumable mortgage is a financing arrangement that allows the buyer to take over the seller’s existing mortgage, including its interest rate, repayment schedule, and balance. 

Previous dips in the real estate market have allowed some savvy buyers to secure incredibly low mortgage rates within the three to four percent range. With today’s interest rates around six to seven percent, scoring an old, low-rate mortgage rate is like striking gold.

Assumable mortgages are one of the most undervalued assets in America," said Raunaq Singh, Founder & CEO of Roam, a platform that helps buyers locate and purchase properties with assumable mortgages. "We started Roam as a way for homebuyers to take advantage of the assumable mortgage opportunity and increase access to affordable rates so that more Americans can realize their dream of homeownership.”

“Taking on an assumable mortgage can be akin to stepping into a financially advantageous position,” explains Richard Haddad, Managing Editor of HomeLight in his article, “How Do I Find a Home With an Assumable Mortgage?

“Instead of securing a new mortgage with higher rates, a buyer can assume the home seller’s existing interest rate, principal balance, repayment period, and other terms of the lending agreement,” he explains.

It’s important to note, however, that not all mortgages are assumable. 

Conventional loans are typically non-assumable, but government-back loans such as FHA (Federal Housing Administration) Loans, VA (Veterans Affairs) Loans, and USDA (United States Department of Agriculture) Loans are assumable. Other loans, including some jumbo loans, and some adjustable rate mortgages (ARMs) may be assumable too.

What Rental Investors Need to Know About Assumable Mortgages:

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Pros of Assumable Mortgages for Rental Investors

For rental investors, an assumable mortgage could be a good opportunity to maximize your returns and keep your costs down. Here are some of the advantages of assuming a mortgage:

  1. More Savings

One of the most compelling advantages of assumable mortgages is the potential to secure a lower interest rate than current market rates. This could help to reduce your monthly mortgage payments and could add up to a considerable savings over the life of the loan.

A lower monthly mortgage payment directly translates to better cash flow management. Your income from rental payments can go towards profit rather than servicing debt, and that extra cash flow can be reinvested in other ways. Knowing ahead of time what your mortgage payments will be can also make budgeting for your rental much easier and help mitigate the risk of fluctuating interest rates.

  1. Reduced Closing Costs

The closing costs on an assumed mortgage are typically lower than those for a new mortgage. For example, USDA loans charge a 1% funding fee for new loans, which you won’t have to pay with an assumed mortgage. If the loan was for $300,000, that’s $3,000 in immediate savings. Fewer costs mean more of your capital stays in your pocket and is available for other investments or even improvements to the property

You can also get savings on appraisal fees, which are often waived or reduced since the property has already been appraised. Lender fees are also lower because of the existing loan setup. Other administrative costs related to processing and underwriting the loan are also typically reduced. Some fees will still apply, however.

  1. A Shorter Loan

When you assume a mortgage, you’ll only have to pay the remaining years of the loan. So, for example, if you assume a mortgage when the seller is ten years into a 15-year mortgage, you’ll only have the final five years to pay off.

Read expert tips on How to Maximize Your Rental’s Profit Potential

Cons of Assumable Mortgages for Rental Investors

Have you found a property with an assumable mortgage? Congratulations! Only an estimated 6% of listings are eligible. But before you celebrate winning the real estate jackpot, it’s important to keep in mind that assumable mortgages aren’t right for everyone, and may not even be a good fit for most investors. There are a few downsides to assumable mortgages, including:

  1. It Could Require a Great Deal of Capital

An assumable mortgage could require a great deal of capital up front. You may need to cover the difference between the current balance and what you will be paying for the property. 

If the property’s market value has increased since the original loan was issued, this amount may be significant. Let’s say the home is valued at $400,000 with an outstanding balance of $300,000. In this case, you may need to pay the $100,000 difference. Be sure to assess the current market value of the property and consider the financial implications before proceeding with assuming a mortgage.

How do you spot a good market to invest in? Read Scouting Out New Markets - What to Look for, What to Avoid.

  1. You’ll Still Need to Qualify

You’ll still need to qualify for an assumable mortgage. The lender will review your credit score and finances to ensure that you meet the eligibility requirements. It’s a good idea to check to see if you meet these requirements before attempting to assume a mortgage. Failure to qualify can result in the lender rejecting your assumption application, leading to wasted time and potential loss of the investment opportunity. It’s advisable to consult with the lender early in the process to understand all necessary qualifications.

  1. It Can Take Time to Close

Closing on an assumable mortgage can take time. You’ll also need to keep in mind that a seller may prefer offers from buyers who aren’t looking to assume the mortgage. Unless you’re prepared to offer extra money, they may not be interested. 

  1. There May be Occupancy Requirements

Before taking on an assumable mortgage, be sure to check the terms and conditions to see if you’d be able to use the property as a rental. Some assumable mortgages include occupancy requirements, which may stipulate that the borrower must live in the property for a minimum duration, usually ranging from one to three years, depending on the loan program and lender policies.

FHA loans generally require that the borrower occupy the home as their primary residence within 60 days of closing and live there for at least one year. VA loans may have similar stipulations, where the veteran or service member must intend to occupy the home personally within a reasonable time after closing. USDA loans may also mandate that the property must be used as the borrower’s primary residence. Note that in some cases, exceptions may apply.



What Are the Steps Involved When Assuming a Mortgage?

Here’s a brief overview of the steps you may need to take during the mortgage assumption process:

  1. Assess the Mortgage

First of all, you’ll want to determine if the existing mortgage is assumable. Government-backed loans like FHA, VA, and USDA are typically assumable, whereas conventional loans often are not.

  1. Review the Terms

Review the current mortgage terms, including the interest rate, repayment schedule, and remaining balance. Ensure these terms are beneficial compared to obtaining a new loan.

  1. Contact the Lender

Contact the lender to understand their specific requirements for assuming the mortgage. This usually includes a credit check, income verification, and other financial assessments. 

  1. Discuss the Terms

Discuss the assumption terms with the seller. Ensure both parties agree on the process, including covering any equity difference if the property’s current value exceeds the loan balance.

  1. Make Sure You Can Use the Property as a Rental

You’ll also want to make sure you can use the property as a rental, and that there are no occupancy requirements in place.

  1. Submit Your Mortgage Application

Fill out and submit the mortgage assumption application to the lender. This process is often similar to applying for a new loan.

  1. Conduct Due Diligence

Perform necessary due diligence, including a title search, appraisal, and inspection. This can help to make you aware of potential issues with the property.

  1. Proceed to Closing

If the lender approves the assumption, proceed to the closing process. This involves signing the assumption agreement and other legal documents, paying any required fees, and covering the equity difference.

Are you a first-time investor? Check out Rental Investments for Beginners - A Checklist.



How to Find Assumable Mortgages

Assumable loans can be tremendously tough to find, but in some cases, they could be worth it. Start your search with the options below:

  • Use online real estate platforms and databases to search for homes for sale with assumable mortgages. Use keywords like “assumable loan” or “transferable mortgage” when searching. Some websites have filters specifically for assumed loans, and a few websites specialize in selling homes with assumable mortgages.

Some examples of websites where you may be able to find assumable mortgages include the following:

  • Work to build relationships with an experienced real estate agent. These professionals often have insights into properties with assumable mortgages or can direct you to lenders offering these options. 

  • Focus on loans backed by government agencies such as FHA, VA, or USDA, as these are typically assumable. Visit official government websites or consult with lenders specializing in these loan programs.

In today’s housing market, snagging an assumable mortgage with an interest rate lower than the current market average could be a great way to jumpstart your investments. But remember, these deals are rare and may not work for every investor. Consider seeking guidance from a real estate agent, as they can help you to find a property and may be able to assist you when it comes to navigating the complexities as well. Once you have a property in your sights, you’ll also want to make sure that you conduct due diligence to check any occupancy requirements, and to make sure it checks out as a suitable rental property. Finally, don’t forget to run the numbers to see what type of returns you can expect from it as well.


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