Assumable Mortgages Explained: Benefits for Loan Officers and Your Clients

Today’s mortgage landscape is presenting a lot of challenges for loan officers all across the US. Elevated interest rates have significantly slowed down mortgage applications, with Mortgage Bankers Association reporting the slowest weekly pace since 1995. Prospective homebuyers are rightfully hesitant, making it a difficult environment to do business in - even for the most seasoned loan officer. 

One solution is the assumable mortgage. Assumable mortgages allow buyers to take over the seller’s existing loan, including its interest rate and repayment terms. This can be particularly beneficial in the current market, where approximately 89% of homeowners with a mortgage have an interest rate below 6%, and nearly 60% have a rate below 4%.

From our own analysis at Homebot, we’ve found that 20% of active home listings have assumable mortgages. And if all of those were taken advantage of, consumers would save over $9B in interest over the life of their loans.

For loan officers, understanding and leveraging the advantages of assumable mortgages can provide a much-needed edge. Not only can you make commission off the assumable– but there are opportunities to help buyers leverage a second mortgage to buy out the sellers existing equity– a requirement under assumable mortgages.

This mortgage option can offer significant long-term savings for buyers and create more attractive selling conditions for homeowners. However, they also come with specific challenges and complexities that must be navigated carefully. 

Below, we’re covering all things assumable mortgages– benefits for you and your clients, the challenges and how it can equip you with the tools you need to succeed.

Understanding Assumable Mortgages 

Assumable mortgages allow the buyer to take over the seller’s existing loan, retaining the original interest rate, repayment schedule, and loan balance. This can be a significant advantage, especially if the seller’s interest rate is much lower than current market rates.

When a buyer assumes a mortgage, they must meet the lender’s qualification criteria, similar to applying for a new loan. This includes a thorough review of the buyer’s credit history, debt-to-income ratio (DTI), and other financial details. 

However— these types of loans aren’t like a traditional new loan in all capacities. And while having this option is a massive win for you as a loan officer if your client can qualify for it… this option does come with its pros and cons for your clients.

Pros of Assumable Mortgages for Your Clients 

1. Lower interest rates for your buyers

One of the primary advantages for buyers is the ability to take over the seller's existing mortgage with its lower interest rate, which can be particularly beneficial in a high-rate environment.

2. Increased marketability for sellers

Sellers can attract more potential buyers if their mortgage has a lower-than-market interest rate, making the property more appealing, especially if they haven’t accumulated much equity.

3. Reduced closing costs for buyer 

Without the requirement of an appraisal, this is one less expense the buyer needs to take into consideration during the closing process.

Cons of Assumable Mortgages for Your Clients

1. Limited to certain loan types

Assumable mortgages are generally limited to FHA, VA, and USDA loans. Conventional mortgages are typically not assumable, and USDA loans might require new interest rates and terms rather than inheriting the seller's lower rate. Only about 25% of new mortgages are FHA, VA, or USDA, making assumable mortgages much more difficult for buyers to acquire.

Additionally, your clients need to qualify for the mortgage type they are taking over. For example, if your client is not a veteran, they won’t be able to qualify for an assumable mortgage under a VA loan.How you can help your clients:There’s really only so much you can do in this situation. The best things to do are:

- Be transparent and educate your client on the types of loans that qualify. 
- If an assumable mortgage is not an option, present other mortgage products that may offer competitive rates and terms suitable for the client's financial situation.

2. Difficulty in finding assumable mortgages

Identifying homes with assumable mortgages can be challenging unless explicitly mentioned in the listing or discovered through a real estate agent. Many sellers do not indicate, or even know, if their mortgage is assumable.How you can help your clients:Your clients don’t have the industry expertise or resources you do. It might require a little more work on your end, but you can help them learn about and find assumable mortgages by:

- Collaboration with real estate agents: Work closely with real estate agents to identify listings with assumable mortgages and communicate this information to potential buyers.
- Utilize listing services: Use MLS and other real estate listing services to filter and search for properties that explicitly state assumable mortgage options.
- Marketing strategies: Work with your marketing team to develop promotional materials highlighting the benefits of assumable mortgages and distribute them to clients and real estate partners.

3. Qualification requirements for buyers

Buyers must still qualify for the assumed loan, which involves meeting the lender's credit and financial criteria, unless the assumption is due to the death of the original borrower.How you can help your clients:

- Pre-qualification assistance: Help buyers get pre-qualified to understand their eligibility and what financial adjustments may be necessary to qualify for an assumable mortgage.
- Credit counseling: Provide resources for credit counseling to help buyers improve their credit scores and financial standing to meet lender requirements.
- Transparent communication: Clearly explain the qualification process and set realistic expectations regarding what is needed to assume a mortgage.
- Help them understand qualification criteria for specific mortgage types: VA loans, for example, require you to be a veteran to assume.

4. Buyer must pay seller back existing home equity

While buyers take over the existing mortgage balance, they must still pay the seller for any equity built up in the home, either out of pocket or through an additional loan. Many buyers, especially among the younger generations, struggle to make a down payment let alone paying back equity. This may disqualify many of your clients from being able to afford this mortgage type. How you can help your clients:

- Second mortgage options: Offer advice on obtaining a second mortgage or home equity loan to cover the difference between the purchase price and the remaining mortgage balance. Not only does this give your clients more options, it is an upsell for you.
- Financial planning: Assist buyers in planning how to cover the equity payment, whether through savings, a gift from family, or a second mortgage.
- Negotiation support: Guide buyers in negotiating with sellers to reach an agreement on the equity payment that is fair and manageable.

5. Potential liability for sellers

If the buyer defaults on the loan and the seller hasn’t been fully released from the mortgage liability, the seller’s credit could be negatively impacted. This is a risk many sellers aren’t willing to take with perfect strangers. How you can help your clients:

- Release of liability documentation: Ensure that the assumption agreement includes a release of liability for the seller, protecting them from future financial responsibility if the buyer defaults.
- Legal advice: Recommend that sellers seek legal advice to fully understand their rights and obligations before agreeing to an assumable mortgage.
- Lender coordination: Coordinate with the lender to confirm that all necessary steps are taken to formally release the seller from liability.

6. No home appraisal requirement

While this can be a pro for the seller, it can be a disadvantage for buyers. Without an appraisal, buyers may not have a clear understanding of the current market value of the property, potentially leading to overpaying for the home. How you can help your clients: 

- Suggest an independent property valuation: Advise buyers to obtain an independent property valuation to ensure they are aware of the current market value and are not overpaying.
- Provide a comparative market analysis (CMA): Provide a CMA to give buyers a better understanding of the property’s value based on recent sales of similar homes in the area.
- Suggest your client complete a home inspection: Recommend a thorough home inspection to uncover any potential issues with the property that could affect its value or require costly repairs.

How Loan Officers Can Continue Growing Client Relationships and Adding Value in Challenging Times

Navigating the complexities of assumable mortgages can be challenging for both buyers and sellers. However, with the right strategies and support, loan officers can turn these challenges into opportunities. By educating clients about the benefits and limitations of assumable mortgages, assisting with qualification and financial planning, and providing expert guidance throughout the process, loan officers can help their clients make informed decisions in a difficult market.

In these challenging times, having the right tools and resources is crucial. Homebot is an invaluable tool that empowers loan officers to provide personalized home finance insights, keeping clients engaged and informed. With Homebot, you can offer your clients a comprehensive understanding of their home equity, market trends, and financial opportunities— ensuring they are well-equipped to make the best decisions.