The Game-Changing Assumption Loan: A Buyer's Guide for 2024

In today’s housing market, with mortgage rates still hovering around 6-7% and home prices remaining stubbornly high, many prospective buyers have found themselves stuck on the sidelines.

 

However, a unique financing solution called an “assumption loan” has been rapidly gaining popularity and creating new opportunities for buyers to overcome these challenges

I recently sat down with Mike Roberts, a long-time Phoenix mortgage lender who now specializes in assumption loans through his company Yi Home Loans. Mike is at the forefront of this innovative strategy and shared his expert insights into how assumptions work and why they may be a game-changer for buyers in 2024.

What Exactly Is an Assumption Loan?

At its core, an assumption loan allows a buyer to literally “assume” and take over the seller’s existing mortgage, including their interest rate and loan terms. This is in stark contrast to getting a brand new mortgage at current market rates.

“The key difference is that with an assumption, the seller gets completely released from liability on that loan,” Mike explained. “Once the buyer assumes it, they become fully responsible for the monthly payments and the loan essentially transfers into their name.”

This transfer of liability is a crucial distinction separating assumptions from more complicated “subject-to” deals sometimes used by real estate investors. Those strategies can carry more risk for the average homebuyer.

How Does the Assumption Process Work?

While the idea of taking over someone’s low mortgage rate may sound too good to be true, Mike assured me assumptions are a legitimate, legal, and widely-available option with many lenders. The process is quite similar on the buyer’s end to getting pre-approved for a traditional mortgage.

“You’ll go through the same pre-screening process of providing your income documentation, tax returns, having your credit pulled, etc,” he said. “The underwriting guidelines are just a bit different, usually requiring a couple years’ worth of paperwork instead of just one year.”

Where assumptions start to become vastly different is in the actual financing structure. Mike illustrated with a simple example:

“Let’s say the home is listed for $500,000, and the seller’s existing loan amount that you’d be assuming is $400,000 at 3% interest. There’s going to be that remaining $100,000 “gap” that needs to be accounted for and paid as a down payment of sorts.”

Covering That Down Payment Gap

For the $100,000 gap, Mike explained that buyers have two main options:

  1. Pay the full gap amount out of pocket, which in this case would be $100,000 down.
  2. Bring 10% of the purchase price as a down payment ($50,000 on a $500,000 purchase) and finance the remaining portion of the gap with a separate “piggyback” second mortgage.

“If we go with that second option of putting 10% down, you’d get a $50,000 second mortgage to cover the rest,” Mike said. “That $50,000 loan amount would be at a higher interest rate, maybe around 11% based on today’s rates.”

The Secret: Blended Interest Rates

While an 11% loan sounds unappealing on its own, Mike was quick to highlight the “blended rate” buyers effectively pay with an assumption loan scenario.

“The blended rate factors in that low 3% rate from the opener portion and weighs it against the higher rate on the smaller second loan amount,” he explained. “So in our example, your blended rate across that total financing would be somewhere around 3.9%.”

To put that in perspective, Mike noted that buyers getting a new conventional mortgage today would likely be looking at rates in the 6-7% range from most lenders.

“Even with one loan at 11%, you’re still coming out way ahead at under 4% with the assumption,” he said. “It’s a no-brainer for buyers to pursue assumptions if they can qualify.”

Advantages Worth Considering

Beyond the obvious benefit of securing mortgage financing at a blended rate 2-3% below current market rates, Mike highlighted some other key advantages assumptions provide:

  • Accelerated Equity Position – Since assumptions allow buyers to take over an existing loan, they are essentially “skipping” the early amortization period where each payment goes mostly toward interest. This puts buyers in a better equity position from day one compared to starting over on a new 30-year mortgage.
  • No Appraisal Needed – With assumptions, there is no need for a formal home appraisal since the selling price is a negotiated figure agreed upon by buyer and seller. This eliminates a common pain point and $500-$800 fee.
  • Lower Total Closing Costs – Mike estimates that closing costs for an assumption can amount to 30% less than conventional loan closings. In addition to no appraisal, there are no traditional lender fees or points to pay.

The Assumption Loan Path

Of course, in order to take advantage of an assumption loan, there has to be a willing seller with an existing assumable mortgage.

Luckily, given the current housing market and buyer affordability challenges, Mike has seen no shortage of supply.

“Sellers are absolutely open to doing assumptions when they understand the benefits for them too,” Mike said. “For one, we’re able to share some of those huge cost savings with them through circumventing taxes and doing a full equity buyout.”

Mike noted that in some cases, sellers have seen bidding wars driving their final proceeds up $50,000 or more, all thanks to the assumable loan attached to their property.

“At the end of the day, it’s a huge win for both parties to explore an assumption if the numbers make sense.”
From the buyer’s perspective, the process follows these basic steps:

  1. Get pre-screened and pre-approved for an assumption by a qualified lender like Yi Home Loans
  2. Work with an agent to identify homes with assumable FHA, VA, or conventional loans
  3. Make an offer factoring in the assumption loan scenario
  4. Complete full underwriting and paperwork with the lender
  5. Wait for the servicing lender to approve the assumption (typically 60-75 days)
  6. Close on the purchase by “assuming” the previous loan

Assumptions Unlock Opportunities

Given assumptions allow buyers to secure ultra-low interest rates in the 3-4% range, lock in more affordable monthly payments, and avoid the typical appraisal/lender fee costs, it’s no wonder why this once niche loan strategy is exploding in popularity.

As Mike put it, “In this crazy market, assumptions are unlocking homeownership opportunities that many buyers thought were out of reach. For families that felt priced out, it allows them to get into their dream home while still keeping their mortgage payment affordable.”

If you’re struggling to make the numbers work with today’s mortgage rates and home prices, it’s worth exploring if an assumption loan could be the right solution. Reach out to Mike Roberts and his team at UMe Home Loans to see if you qualify or check their current list of assumption-approved properties!

If you’re planning to move to Phoenix, Arizona, my team and I would love to be your real estate agency of choice.

All you have to do is contact me at

 

E-mail: [email protected]

Cel.: 623-221-8668

 

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