When Tom Slattery shopped for a house this summer, his wish list included some of the normal wants, plus one unusual requirement.
Slattery wanted a good location and plenty of space, of course. — but he also insisted on the possibility of taking over the seller’s reduced rate mortgage.
As mortgage rates soar, buyers are becoming aware of a little-noticed feature of loans backed by the U.S. Department of Veterans Affairs (VA), Federal Housing Administration (FHA), and U.S. Department of Agriculture (USDA) ): it is possible for the buyer to assume the seller’s mortgage.
“Once we realized we could take on a VA loan, we were everywhere,” says Slattery, a U.S. Coast Guard officer.
In September, Slattery and his wife closed a home in Alexandria, Va., taking over the seller’s VA loan at a rate of 2.75%. Slattery stepped in as a borrower and is now making monthly payments.
If he had taken out a new mortgage at that time, he would be paying around 6.5%. A mortgage of $535,000 at 2.75% results in a monthly payment of $2,184. Raise the rate to 6.5% and the payment jumps nearly $1,200 to $3,382.
Put another way: For Slattery to keep a monthly payment of around $2,180, he’d have to narrow his search to a much cheaper house with a mortgage of just $345,000.
“We were very lucky that this was possible,” says Slattery. “We were able to achieve a better price range.”
“A pretty impressive advantage”
Conventional mortgages — those supported by Fannie Mae and Freddie Mac — account for two-thirds of all home loans in the United States. These mortgages are not assumable, but FHA, VA, and USDA loans are. (USDA loans, however, tend to come with a new rate if assumed in an arm’s length transaction.)
Now that mortgage rates are in the 7% range and home sales have plummeted, some sellers and their listing agents are marketing assumeable mortgages as a way to make their listings stand out.
“Historically, assumptions haven’t been a widely used tool, but we’ve seen business double year over year,” says David Sheeler, senior executive vice president at Freedom Mortgage.
“That’s a pretty awesome perk to be able to offer a buyer,” says Chris Birk, vice president of Mortgage Insight at Veterans United Home Loans, which specializes in VA loans.
A nice concept — but full of challenges
Alas, finding listings with assumable mortgages is not an easy task. Slattery says he typed the phrase “VA loan” into online searches to see which vendors were offering the valuable perk.
For the arrangement to work, the seller must have a VA, FHA, or USDA loan at an attractive rate. It helps if the loan balance matches the buyer’s needs. The FHA requires that borrowers who take on loans go through the same credit checks and qualification process as the original borrower.
In Slattery’s case, the purchase price of the home was $595,000 and the loan amount was $535,000. His deposit fund was sufficient to cover the gap between the two figures.
For VA-eligible buyers who take on VA loans, the move is a good deal. Lenders may charge a $300 processing fee and local authorities may levy registration fees, but no appraisal is required, Birk says.
However, things can get messy quickly when it comes to taking on mortgages. For example, if the value of the house is much higher than the mortgage balance, the buyer will either have to pay the difference in cash or find a lender willing to issue a second mortgage and take a second lien position, a riskier place for the lender.
Meanwhile, the VA’s rules for taking on loans can be complicated. Slattery and the seller of the house were eligible for VA loans, which made their transaction easier, but what if the buyer isn’t in the military?
A VA borrower may authorize a civilian to assume the VA loan, but this reduces the VA borrower’s ability to take out future VA loans. Additionally, if a civilian assumes a VA loan and later defaults, the seller may lose some or all of their ability to borrow a VA loan down the line.
“Veterans learn that and they’re like, ‘No, I don’t want to lose that advantage,'” Birk said.
These details complicating the transaction, support remains rare. Since 2020, Veterans United has issued 170,000 VA purchase loans, and fewer than 10 of those mortgages have involved assumptions, Birk says.
“I think the interest will continue,” says Birk. “I’m not sure many will make it to the finish line.”
