Assumable Mortgage Tips for First-Time Buyers

Are you a first-time homebuyer feeling discouraged by today’s high interest rates? There’s a lesser-known strategy that might be your ticket to homeownership: assumable mortgages. While most new buyers focus solely on conventional loans, more house hunters are discovering they can potentially save hundreds of dollars. This is done by taking over someone else’s lower-rate mortgage. Current mortgage rates are currently hovering between 6-7 percent. The opportunity to assume a mortgage at 3-4 percent could be the difference between affording your dream home or continuing to rent.

What is an Assumable Mortgage?

An assumable mortgage is a home loan that allows a buyer to take over the seller’s existing mortgage. This is in place of obtaining a completely new loan. The biggest advantage is that you inherit the original interest rate. You’ll also take on the remaining term, and principal balance of the loan. As a first-time buyer, this means you could potentially secure an interest rate lower than what’s currently available on the market.

Not all mortgages are assumable. Most conventional loans backed by Fannie Mae and Freddie Mac don’t offer this feature. That means assumable mortgage listings can be harder to find. The most common assumable mortgages are government-backed loans, including FHA, VA, and USDA loans.

What makes assumable mortgages especially valuable in today’s market is their potential to lock in interest rates from a more favorable economic period. Many existing mortgages originated between 2020 and 2022 have rates as low as 2-4 percent. For a first-time buyer, assuming one of these mortgages could translate to thousands of dollars in savings over the life of the loan.

How Does an Assumable Mortgage Work?

When you assume a mortgage, you’re essentially stepping into the seller’s shoes financially. Here’s how the process typically unfolds:

First, you’ll need to find a home with an assumable mortgage by looking at assumable mortgage properties listings. Once you’ve found a property you’re interested in, you’ll need to qualify with the original lender. The lender will review your credit score, income, debt-to-income ratio, and other financial factors to ensure you meet their requirements for taking over the loan.

If approved, you’ll pay the seller the difference between their current home value and the remaining mortgage balance. This is known as the equity position. For example, if a home is selling for $400,000 but the assumable mortgage only has $250,000 remaining, you’ll need to come up with $150,000 to pay the seller directly.

This equity gap is often the biggest hurdle for first-time buyers pursuing assumable mortgages. You can cover this amount through:

• Cash savings
• A gift from family members
• A second mortgage (though this may offset some of your interest rate savings)
• Seller financing (where the seller acts as a lender for part of the purchase price)

During the assumption process, the lender will charge an assumption fee (typically 0.5-1 percent of the remaining loan balance), and you’ll need to pay for title insurance and other closing costs. However, these are usually lower than with a new mortgage. Once approved, the lender transfers the mortgage to your name, and you begin making the monthly payments at the original interest rate for the remaining term of the loan.

Tips for Assumable Mortgages as a First-Time Homebuyer

Navigating the assumable mortgage process requires some specialized knowledge. If you’re a first-time buyer interested in taking advantage of this opportunity, here are some practical tips to get started:

• Begin your search for assumable mortgage listings by using specialized search terms or working with an experienced assumable mortgage listings real estate agent.
• Verify which type of loan backs the mortgage, as FHA, VA, and USDA loans offer the most straightforward assumption process.
• Get pre-approved before house hunting to ensure you meet the lender’s qualification requirements for assuming the loan.
• Develop a solid plan for financing the equity difference between the home’s value and remaining mortgage balance. This will be your biggest cash requirement.
• Ask the seller to provide a mortgage statement showing the current interest rate, remaining balance, monthly payment, and whether it’s fixed or adjustable.
• Evaluate the remaining loan term carefully. As an assumable mortgage with only 10 years left might have lower payments but requires refinancing sooner than a fresh 30-year loan.
• Have the home professionally inspected, as attractive mortgage terms don’t guarantee the property is in good condition.
• Consult with an attorney familiar with mortgage assumptions, as the legal process has unique requirements that not all real estate attorneys regularly handle.

At REMAX, our experienced agents understand the intricacies of assumable mortgages. They can help you identify these valuable opportunities. Contact your local agent to discuss how an assumable mortgage could be your key to affordable homeownership.