House Hacking with Assumable Mortgages
Housing costs make up the largest expense for most Americans. Investors looking to reduce living costs, build equity, and generate rental income have become fascinated with house hacking.
However, investors searching for deals are facing headwinds from the market. Low inventory paired with high interest rates do not make for ideal buying conditions. As a result, cash flow is hard to come by these days. This shift has pushed investors, including house hackers, to get creative to make the numbers work. Tactics like renting by the room or short-term rentals are gaining popularity.
Perhaps the best-kept secret in real estate circles is an opportunity called assumable mortgages. This unique type of financing enables house hackers to turn back the clock on interest rates, scoring loans as low as 2%. This results in increased buying power.
What are Assumable Mortgages?
Assuming a mortgage means taking over the seller’s existing loan rather than originating a new one when purchasing a home. All government-backed loans, such as FHA and VA loans, are assumable. There are millions of these assumable mortgages in existence. In 2020 and 2021, when most new mortgages came in below 4%, around one-third of those loans can now be assumed.
How the Assumption Process Works
Similar to a traditional mortgage application, assuming the mortgage from the seller requires going through underwriting with the mortgage servicer when you assume the loan. The current mortgage servicer will want to verify you have adequate funds and credit history aligned with the loan requirements. They will also conduct any other due diligence as part of the approval process.
When you assume a mortgage, you become accountable for the remaining loan balance and take over the seller’s monthly payments while keeping the existing interest rate. To take on the loan balance, you’ll need to buy out the seller’s current equity in the property.
Consider this scenario for a potential seller:
- Property value: $300,000
- $60,000 in equity
- 2.5% interest rate
You would need to bring $60,000 to closing, leaving you with a remaining loan balance of $240,000 at 2.5% interest.
In situations where a larger down payment is mandatory, you may be able to take out a second mortgage for 80% of the LTV ratio. Although the second mortgage would have today’s interest rate, your blended rate between both loans would be far lower versus taking out a brand new mortgage.
If you opt for this strategy, calculate your savings based on the blended rate of the two loans to see if pursuing the assumable mortgage makes financial sense.
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Types of Assumable Mortgages
You can’t assume just any seller’s mortgage. As noted earlier, all government-backed loans are eligible for assumption, provided you satisfy the eligibility and underwriting conditions.
Here are some examples of assumable government-backed loans:
FHA (Federal Housing Administration): If you don’t currently have an FHA loan, you can assume one.
VA (Veterans Affairs): You don’t need to be a veteran to assume a VA loan.
USDA (U.S. Department of Agriculture): These are likely in more rural locales, so if that’s where you want to buy, look into this option.
In contrast, most conventional loans are not assumable. That’s because they often have a due-on-sale clause requiring the outstanding balance be paid off when the property is sold. There are some exceptions for conventional loans: successor in interest (after a death), divorce, and a family purchase.
Why House Hackers Should Capitalize on Assumable Mortgages
Assumable mortgages can be a huge asset for house hackers. Before you can leverage them, it’s vital to grasp the ways they can jumpstart your investment portfolio.
Increased Mortgage Eligibility
As an astute house hacker, you have a distinct edge since you’ll occupy the property as your primary residence – a prerequisite for getting approved for an assumable government loan.
Lower Interest Rates
Recently, interest rates reached a 23-year peak. So why purchase a home at over 7.5% when you could assume a mortgage with a rate as low as 3%?
Let’s assume your down payment is $35,000. If you bought a $350,000 house at just over 3% instead of 7.5%, your monthly payments would be approximately $1,360 versus $2,380. That equates to over $12,000 in savings per year. Consider how much easier it will become to offset those payments and transform that home into a cash-flowing asset down the road.
Improved Cash Flow
Ask any investor browsing the MLS or off-market deals, and they’ll likely say cash flow is scarce these days. In contrast, those who purchased properties during the era of historic low rates looked like investing geniuses, even if they weren’t.
A byproduct of low interest rates paired with a potentially larger down payment from an assumable mortgage is increased cash flow, both now and later. While occupying the property, you may be able to live for free, lower expenses, or put extra money in your pocket.
The wealth snowball really picks up momentum when you move to your next investment. You can rent out the space you formerly lived in to generate more income – whether that’s an extra unit, in-law suite, ADU, or bedroom.
What’s the Catch?
If assumable mortgages are so beneficial, why don’t more people use this strategy?
To put it simply, finding an assumable mortgage on your own is challenging. And even if you locate a suitable home with an assumable loan, the lack of knowledge around the assumption process poses another obstacle.
Now, house hackers have access to resources to overcome both hurdles.
Finding an Assumable Mortgage Simplified
Historically, locating homes with assumable mortgages has been extremely difficult. Keyword searches for “assumable mortgages” on real estate sites only produce a handful of results. The vast majority stay concealed in plain sight.
Thankfully, new platforms are emerging to solve the assumable mortgage discovery problem. These sites aggregate and analyze public records, MLS data, and other sources to identify homes with assumable loans.
For house hackers, this finally provides a straightforward way to find assumable mortgages. Rather than spending countless hours combing through records yourself, you can use these platforms to instantly see listings with assumable loans.
The process has gone from endlessly searching for a needle in a haystack to simply filtering for assumable mortgages with the click of a button. These new resources help remove the main obstacle that’s prevented more people from capitalizing on this powerful real estate investing strategy.
Streamlining the Loan Assumption Process
Did you know approximately 29% of homeowners have an FHA or VA mortgage? Yet the FHA has only processed around 3,300 assumptions this fiscal year – just a tiny fraction of what’s out there.
Part of this stems from limited access to a database of assumable mortgages. The other part of the equation comes down to three factors:
Unfamiliarity: Because of the small number of annual assumptions, many agents, buyers, and sellers are unfamiliar with the process.
Lack of incentive for mortgage servicers: Mortgage servicers earn more by originating a new loan versus an existing mortgage. Servicers also make more in interest from higher rates.
Paperwork: The assumption process tends to take longer than a typical sale. There’s very specific documentation to ensure the loan successfully transfers. Incorrect filing or missing information can delay closing.
You can certainly take this on yourself if desired, but you don’t have to. For a 1% fee, Roam oversees everything to keep the transaction on track. This includes managing loan servicers, assisting with paperwork, and making the process turnkey for agents.
Another Tool for Your House Hacking Toolkit
The power of assumable mortgages is immense for those positioned to leverage them. This largely untapped instrument offers tremendous potential for real estate investors aiming to maximize returns.
However, not every home has an assumable mortgage. As you navigate your real estate journey, you’ll likely face choices. You may need to weigh options between your dream home in an ideal area versus a better rate, or exercise patience to find the perfect fit.
Ultimately, the decision is yours. Ask yourself: “Are the potential benefits worth the effort?”
Source: Sunrise Capital Group
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