Assumable mortgages, or home loans that pass on their mortgage rate from a home seller to a buyer, are considered an attractive option these days: They effectively allow buyers to inherit a far lower interest rate at a time when mortgage rates are higher than 7%.
And while these loans are relatively hard to find overall, prospective home buyers are most likely to find them in real-estate markets where there is a substantial military presence, according to a new report.
The report, from Realtor.com, found that out of all active U.S. listings to date this year, only 0.4% of for-sale listings were advertised with an assumable loan. But “some areas, especially those with a large military presence, saw a higher share of homes advertising this appealing loan strategy,” said Hannah Jones, the author of the report.
The markets with the biggest share of listings boasting an assumable mortgage include the following:
- Honolulu, at 3.3% of listings
- New Orleans-Metairie, La., at 2.83%
- Ogden-Clearfield, Utah, at 1.57%
- Tucson, Ariz., at 1.39%
- Augusta-Richmond County, which straddles Georgia and South Carolina, at 1.25%
“Not all sellers may be open to this option, but some are not only open to the option, they also are advertising it as a differentiator to attract buyers,” Jones wrote.
Many aspiring homeowners are finding it too expensive to buy a home right now, with mortgage rates around 7% and home prices continuing to rise. To buy a median-priced $397,000 home at a rate of 7%, a person would need to make at least $108,000 per year.
The vast majority of respondents to a recent Realtor.com survey said they would jump at the opportunity to buy a home if the 30-year-mortgage rate fell below 4%. About nine in 10 homeowners have a mortgage rate below 6%, while 23% have a rate below 3%, according to the real-estate brokerage Redfin.
Realtor.com is operated by Move Inc., a News Corp subsidiary. MarketWatch publisher Dow Jones is also owned by News Corp.
Most government mortgages, such as mortgages backed by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture, are assumable. About 8% of U.S. home loans over the last five years were VA loans and 15% were FHA loans, Jones estimated.
But these mortgages come with a catch: They aren’t easy to assume.
Assumable mortgages come with strings attached
Assumable loans come with conditions and potentially costly delays.
A buyer who assumes a mortgage would still need to pay the difference between the remaining loan amount and the home’s sale price. That could necessitate taking on another mortgage — in effect, holding two mortgages with different interest rates.
Mortgage lenders also see little incentive to process assumable loans, since the lenders make less money doing that than they do by originating a new loan. Servicers can charge up to $900 to work on a loan assumption, but the direct and indirect costs to do so can total $2,500, according to a 2022 analysis by the Urban Institute’s Ted Tozer, a former president of Ginnie Mae, which securitizes all FHA, VA and USDA mortgages for the secondary market.
When asked whether the FHA had any plans to promote the use of assumable loans, an agency spokesperson told MarketWatch that it is “actively evaluating its current policies governing assumptions and could decide as early as this spring whether to pursue updates.”
Some home buyers, in complaints submitted to the Consumer Financial Protection Bureau, have alleged that hiccups during the assumption process put them in housing limbo.
One person said that when they were going through the process of assuming the mortgage, their lender ghosted them. “No one will respond to phone calls or emails,” wrote the buyer, a Michigan service member assuming a VA loan. “The seller is losing money, we are losing money.”
Another buyer also complained about delays. “We could lose out on this house,” the Virginia buyer wrote.
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