Homebuyers are reviving a forgotten strategy to secure much lower rates
With mortgage rates holding steady around 6%, prospective homebuyers are turning to an often-overlooked financing option: assumable mortgages.
Google searches for "assumable mortgage" spiked earlier this year as buyers looked for alternatives that could allow them to take over a seller’s existing mortgage at a lower rate, sometimes as low as 3%.
These loans, once a more common option decades ago, allow buyers to take over an existing mortgage, preserving the original interest rate. However, they became less common after the Garn St.-Germain Act of 1982, which gave private lenders the ability to demand full payment if a property changed hands.
Today, assumable mortgages are primarily limited to government-backed loans, including Veterans Affairs (VA), Federal Housing Administration (FHA), and Department of Agriculture (USDA) mortgages.
“Twenty per cent (20%) to 25% of the homes on the market will be fully assumable at one time,” Raunaq Singh, CEO of assumable mortgage platform Roam, told CNBC. “[But] the number of assumption transactions that are happening is far fewer than the number of mortgages which can be assumed.”
Though assumable mortgages remain a niche option, they’re gaining traction. In 2023, FHA-backed mortgage assumptions rose by 59% compared to 2021, with 4,052 assumptions completed. The VA has seen an even more dramatic increase, with 713% more assumptions in 2023 compared to 2021.
Both the VA and FHA are on track to surpass last year’s totals, with each having completed over 5,000 assumptions in 2024 so far.
Despite this growth, assumable mortgages remain a niche option. FHA loans made up 15.9% of total mortgage applications last week, down slightly from 16.2% the previous week, according to the Mortgage Bankers Association (MBA). VA loans accounted for 16.2% of applications, down from 16.9%.
“Demand is holding up to an extent for prospective first-time buyers,” explained MBA deputy chief economist Joel Kan. “FHA purchase applications were little changed despite the increase in rates, as some first-time homebuyers remain in the market because of improving housing inventory conditions.”
Read next: Higher mortgage rates drive down application activity
As interest rates continue to rise, mortgage activity has slowed overall. The MBA reported a 17% drop in applications for the week ending October 11, reflecting the challenges buyers face in affording homes at today’s rates.
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