Assumable loans are eye candy in today’s housing market. The idea of taking over somebody’s 2.5% loan sounds amazing, right? It’s technically possible on paper for some loan types, but it’s challenging to pull off in the real world. Yet, if mortgage rates remain high, this is something we’re likely going to hear more about, so it’s important to know the process.
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8/29/23 Elk Grove Regional MLS Meeting
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9/26/23 Orangevale MLS Meeting
9/28/23 Yuba City Big Market Update (in Yuba City (details TBD))
10/4/23 KW Sac Metro Big Market Update (register here)
10/6/23 SAR Think Like an Appraiser (TBD)
10/27/23 AI Fall Conference (San Francisco)
IT’S RARE TO ASSUME A LOAN (FHA, VA, & USDA)
I’m not a loan officer, so I won’t step out of bounds here, but it’s basically possible to assume an FHA, VA, or USDA loan from a current owner if the loan servicer is cooperative and everything else lines up between the buyer and seller. Conventional loans are NOT assumable, but I’ll defer to loan officers if there are rare cases where that can happen (seriously, talk to a loan officer). In short, it has to be the perfect storm of the right buyer, right seller, and right loan servicer to make an assumption happen.
UPDATED NOTE: A few people have said current FHA loans are not assumable, but everything I’m reading online from lenders and HUD directly seems to show FHA loans are assumable. My advice? Talk to a loan professional and the loan servicer. I defer to them.
HOW MANY LOCAL LOANS CAN BE ASSUMED?
Here’s a snapshot of FHA & VA transactions since 2009 in the Sacramento region. Of course, some of these properties have sold again already, but this is a general picture of how many potential assumable loans are out there. The real prize for a buyer would be purchasing from a seller who bought during the past few years when rates were really low (though many of those owners are sitting instead of selling).
WHAT PERCENTAGE OF THE MARKET IS ASSUMABLE?
Okay, but what percentage of the market has sold in recent years with loans that could theoretically be assumed in the future? In 2020 nearly one out of every five homes sold with FHA or VA, and since then it’s been about 15% of loans.
A LOCAL LISTING EXAMPLE
Here’s a property in West Sacramento that was purchased in 2020 with FHA financing, and the listing advertises, “Seller offering a possible loan assumption at 2.75% as part of purchase price.”
BIGGEST HURDLES TO ASSUMING A LOAN:
1) Paying the difference: The buyer has to pay the difference between the loan amount and the equity the owner has. This means if a property has a $400,000 loan, but it’s worth $525,000, there is a big chunk of change for the buyer to bring to the table. Some loan officers tell me it’s possible to get a HELOC (Home Equity Line of Credit) to pay the difference, but I’ll defer to lenders on that. All that said, it seems like buyers putting 20% down are often decent candidates to assume a loan because they can absorb the difference between the loan and value in many cases.
2) It can take a long time: I mentioned loan assumptions in a Facebook thread a few days ago. I heard about one local loan assumption taking FIVE MONTHS, another taking three months, or a quick one at 30 days. Look, maybe this process can be seamless once in a while, but can you imagine being in contract for five months without a guarantee of success? That is going to take a very particular seller and buyer, right? Moreover, if there are multiple offers, the seller is unlikely to choose the buyer wanting to assume the loan. This reminds us market conditions can either foster more or less loan assumptions.
3) The loan servicer isn’t always cooperative:
There are situations where the loan servicer simply denies the loan assumption. One real estate agent told me loan assumptions are basically a buzzword because they’re difficult to pull off. Sounds about right.
THIS MARKET REQUIRES CREATIVITY:
There is no sugarcoating assuming a loan as an easy process, but I think this market requires creativity. My advice is to understand the process, advertise the idea of an assumption if the seller is on board, talk to the loan servicer prior to listing, and help educate everyone on the process. Oh, and realize this is still a unicorn event that requires the perfect storm of everything coming together. This isn’t for the faint of heart, but it will work in some situations.
OKAY FINE, MORE NEW VISUALS
You wanted more visuals? This post is getting longer already, but okay. I put these together a few days ago, and I hope you like them.
CLOSING ADVICE:
My advice? Don’t put much hope in loan assumptions, but know how it all works so you can at least be aware of options. Like I said, it’s going to take the right buyer, right seller, informed real estate professionals, and a cooperative lender. When loan assumptions do happen locally, try to find out how the deal came together. The truth is buyers are starving to afford the market, and assuming a seller’s loan is going to help a small sliver of buyers out there. Ultimately, if rates remain high, this is going to be something more people are thinking about, and it’s possible we could see more loan assumptions ahead for that reason. If the market gets more competitive though, loan assumptions are the last thing sellers are going to target.
I hope this was helpful. Thanks for being here.
Questions: Anything to add about loan assumptions? Any stories to share? Could it matter for comps if we start seeing more loan assumptions? I’d love to hear your take.
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The only thing missing from this post is Adjustable rate mortgages, stated income, no doc loans, and hey trust me I can make this work. LOL. got to say Ryan you caught me on this one. Thought assumable was a thing of the past. And by the way what was going on back in the day when assumable loans were all the rage? Thank you Ryan, great stuff as always. Best to you and your family.
Everything comes back in style… (except popcorn ceiling texture (hopefully)). 🙂 In truth, assumable loans haven’t been relevant in so long since rates have generally been going down for so many decade. Yet, now we’re in a situation where they could start to be relevant again. In theory at least. We’ll see what happens in the real world. This is absolutely something to watch though.
Thanks as always Brad.
Appraiser speak: If the hypothetical conditions were perfect, it would be extraordinary to assume a low interest loan. However, in the current market, I would think that assumable loans are not really customary and reasonable. The average buyer with Q4 quality credit might not even qualify for the loan. LO to Borrower: I can get you an assumable loan almost as easy as I can throw this football over that mountain.
Haha. Too good, Mark. Or wait, that was subjective terminology. Your comment was at least a Q2. Extra points for the Uncle Rico reference. I see you.
Great insight. The market would need to be deeply distressed to gain the necessary cooperation in a widespread way. Maybe assumptions will pick up more momentum. But for those who handled short sales in the past, they should view assumptions with the same patience.
Agreed. Thanks Geoff. Like I said in my closing, a dull market would help propel this trend to happen more, but a really competitive market with multiple offers isn’t fertile ground for this happening more.
Fixed-rate mortgages in any format are not assumable and haven’t been for many years.
There’s really no benefit to assuming an adjustable-rate mortgage.
Yeah, I agree there. Not much of a tractor beam to pull buyers in. Where are you hearing FHA is not assumable though? Everything I’m seeing online states that it is.
The data you provided is great Ryan. It shows that assuming loans have a slight chance to make a deal close. For a buyer that wants to buy and seller that needs to sell, that’s all that matters (if the conditions and expectations are set); 15% opportunity is better than 0%. Proud to say I was able to ok close on an assumption loan for my sellers
Thanks so much Christopher. Yeah, I think we need to at least know about this. In my DMs today I heard from a loan officer who said it’s so incredibly difficult to get one approved. He has yet to see one approved actually. Like he said, the loan servicer isn’t in the origination business, so it’s not like there is much incentive to approve something like this. Anyway, let’s keep watching. I think this will work for a small sliver of the market. And for that sliver, we need to understand the process.
First of all I am I huge Lundquist fan. Everything from the witty dialog to the great lengths you go to find data. I have been watching the assumable market and there are many places this is going to make sense. Our office has done 2 and they were both done under 60 days. An FHA and a VA. I have 3 more people in the pipe right now looking for the right opportunity. We found a way to pull data on homes that have less than 5% equity and a loan rate under 4%. Most of the clients we are working with will save approx $700/mo and are getting 28 year loans instead of 30, so the total intersest savings usually exceed $250,000. Just a little feedback. I will keep you up to date as we close more.
Gary, thanks for the kind words. And that is really awesome to be able to target properties that are viable candidates. So smart. I’m impressed. Please keep me posted with what you’re seeing. I am starting to hear about more assumptions, which is why I wrote this post.
Gary wrote: Our office has done 2 and they were both done under 60 days. An FHA and a VA.
Are you saying that you recently closed a fixed-rate FHA loan originated prior to December 1, 1986? Because after 12/1/86, a fixed-rate FHA loan was not assumable.
Hey Ryan,
Just heard a very experienced mortgage broker report that many FHA loans are not assumable. Another mentioned how long it’s taking to get through. This is not something for the faint hearted to try.
ALL fixed-rate mortgages, including FHA, are NOT assumable.
I’m hesitant to get into the weeds of loans since that is not my turf. But not assumable? Are you saying only variable-rate loans are assumable?
Fixed rate FHA loans became non-assumable on December 1, 1986. Prior to that date, FHA loans were assumable, meaning that a borrower could transfer the loan to a new buyer along with the property, allowing the new buyer to take over the existing loan terms. However, after December 1, 1986, the ability to assume fixed rate FHA loans was restricted, and only adjustable rate FHA loans remained assumable under certain conditions. This change was made by the Federal Housing Administration (FHA) in an effort to prevent potential abuse of the assumability feature and to better align with market conditions at the time.
Catherine: I belive your referring to informal assumptions. Prior to 1986 a buyer could assume and FHA loan without the approval of the loan servicer/lender, the seller simply provided a deed to the buyer subject to the buyer assuming the existing loan. As an agent I listed, sold and at times purchased properties in such a manner. After 1986, FHA loans could be assumed if the buyer loan servicer/lender agreed and the buyer qualified with a formal application. The seller was released from liability for the payment of the balance under these conditions. With the informal assumption the seller could still be held liable for payment if the buyer failed to make payments. VA had a similar program but with more stringent underwriting requirements.
Thanks Ronald. Very helpful.
Hmm, interesting. I’ve heard the exact opposite in reading I’ve done online and in stories I’m hearing from the real estate community lately about specifically assuming FHA loans. A few people in this Facebook post stated FHA loans have been assumed recently. https://www.facebook.com/SacramentoAppraiser/posts/pfbid09masT7A8Wp1qBG7N7TxgVfs1C8u1NUW9YQbt9k9fUfFyVsBL5DV8N3aktBQCz9VCl
Assumptions are difficult. I wonder if part of the issue is the real estate community being really out of practice with these types of loans. They are very difficult to do, but it’s also been something that hasn’t been relevant for so long. It almost feels like a shout out to the 80s to even be talking about this.
Adjustable rate FHA loans remained assumable even after the changes made on December 1, 1986. Unlike fixed rate FHA loans, which became non-assumable on that date, adjustable rate FHA loans retained their assumability feature under specific conditions.
FHA Mortgagee Letters from around that time would confirm these details.
Hmm, interesting. So I guess the FHA assumptions currently happening from reports from agents are adjustable rate? Didn’t know that product existed for FHA.
HUD changes in 2011 allowed them to be assumable. But I have only heard how difficult it can be. Good article, thank you!
Thanks Polly.
Polly, I’m not tryna make you wrong. I’m seeking only credible confirmation of the topic under discussion. Here’s a list of 40 Mortgagee Letters issued in 2011. Can you point to the one that changed the assumability of fixed rate mortgages? We already know that adjustable rate mortgages are assumable. Thanks.
https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee/2011ml
Here is something I see straight from HUD in 2011. What do you make of this?
4155.1 7.1.a
Assumability Restrictions
All FHA-insured mortgages are assumable. Mortgages originated before December 1, 1986 generally contained no restrictions on assumability, while those originated after that date have certain restrictions. Depending on the date of the loan origination, the lender may require a creditworthiness review of the assumptor. To determine what restrictions have been placed on the mortgage, the lender must review the mortgage’s legal documents. Lenders should note that some mortgages executed from 1986 through 1989 contain language that is not enforced, due to later Congressional action. Mortgages from that period are now freely assumable, despite any restrictions
stated in the mortgage.
Thanks for the convo (that’s me – not HUD).
https://www.hud.gov/sites/documents/4155-1_7.PDF
This topic is worth studying, in my opinion, because it offers a powerful selling point for sellers in today’s market. First, HUD Handbook 4155 has been replaced, not in every portion, but in many portions, by HUD Handbook 4000.1. According to this site, Handbook 4000.1 makes no distinction between fixed rate and assumable rate FHA loans, but I’d prefer to read the entire Mortgagee Letter to confirm.
https://www.fhanewsblog.com/fha-loan-assumption-rules-in-hud-4000-1/#:~:text=HUD%204000.1%20states%2C%20%E2%80%9CThe%20assuming,Secondary%20Residences%E2%80%9D%20as%20mentioned%20above.
Thank you. So, it sounds like FHA loans are definitely assumable, but now the lender plays a role instead of being “freely assumable” in the past as this article indicates. Is that your understanding?
A Mortgagee Letter always accompanies any change to the HUD Handbook 4000.1. I’d have to read both the applicable Mortgagee Letter and the pertinent portion of Handbook 4000.1 to know for sure. I wouldn’t rely on the author of a website. (Except for yours, of course.)
Thanks Catherine. I really appreciate your commitment to integrity and being fully-informed. I’m glad you brought this up. If you end up gleaning any further information, please speak into this. I always want to convey the most accurate information possible. And I totally agree about being really careful about blindly trusting what people say online.
I asked my broker hivemind for assistance in determining the current policy regarding assumption of FHA loans. I’ll report back.
Great discussion. I think real estate agents will need to be creative to continue to sell if this market continues with high rates and if inventory ticks up.
Thanks Gary. Totally agree. This market requires creativity in many ways, and it’s critical to keep all the available tools in the tool belt.
Nice post Ryan!
Thank you so much Logan. I appreciate it.
I got some interesting insight on this from Anna Kelley. VA loans are the only type, of the FHA, VA and USDA loans, that are assumable *for investors.* The FHA and USDA assumptions have to be owner-occ. But in the case of VA loans, because, according to what Pennymac told Kelley, they want to “help veterans sell in a challenging market” … they actually DO let investors assume those loans without moving in, themselves. You’ll still probably get some pushback from certain loan agents because this is new territory for them, but according to the actual underwriting guidelines from the company that buys the loans, they do make exceptions for VA loan assumption by investors.
I also read on a Facebook group that if the seller’s loan has a checkbox on the loan documents “this loan is assumable,” you’re good to go.
While I always prefer to read it straight from the horse’s mouth, I can’t confirm this or anything else regarding assumability in HUD Handbook 4000.1.
Thanks Aidan. This is a great tidbit. I can understand the logic too when thinking about the mission of the VA and FHA.
Other points to consider:
FHA life-of-loan MMI [monthly mortgage insurance] became a policy in June 2013. Even if you assumed an FHA loan when interest rates were at their historical lows, you’d still have .75 monthly mortgage insurance forever.
The assuming buyer would have to make up the difference in sales price and loan balance so while it could be assumed, that large of a down payment probably isn’t likely.
For these reasons, an assumption of the seller’s loan probably doesn’t make sense except maybe as a placeholder for when rates might come down again.
Great post, Ryan! Do we know why the numbers of assumable loans are so much less now than in the past?
Hey Beth. Thanks so much. Two things: 1) The number of potential assumable loans is so much lower today since conventional financing has become much more dominant in the marketplace. In 2009 we didn’t have many low-down conventional options, so FHA was a huge chunk of the market. The graphs really show FHA has diminished over time as conventional has become more attractive; 2) Actual assumable loans have been so low in recent years because rates have been ultra low. There just hasn’t been much of a need since the rate was often better as time went on. Moreover, with a competitive market, I suspect an assumable loan has been a bit like an FHA 203K loan in a hot market. Not easy to pull off since there are many offers. Why would a seller wait for the long process of an assumable loan when there are other buyers lining up wanting to pay top dollar? Yet, the climate of today is different, and we are starting to see more conversation about assumable loans because now it feels like a great option.
Great Topic. I follow you from Florida. Here in Jacksonville we have a huge military population (active and retired). I think we are going to see an increase in ‘assumption offers’. I am starting to see a few remarks in our MLS regarding assumable loans.
Thank you so much Ann. I’m seeing something very similar in that we’re hearing more stories from the trenches. You are right that the dynamic could be more pronounced in a military town too. Today I saw a headline about a tech startup trying to be the middle person for loan assumptions (for a fee).