Why the Assumption Loan Craze is a Game-Changer for Real Estate Investors

In today’s housing market climate of high interest rates and stubbornly inflated home prices, many real estate investors have found themselves stuck on the sidelines. Once promising investment property deals have become unlucrative as soaring mortgage rates eat away at cash flow and make it nearly impossible to pencil out positive returns.

 

However, a new innovative financing strategy called an “assumption loan” is allowing savvy investors to circumvent these challenges and revive cash flow on investment properties. I recently spoke with Mike Roberts from UMe Home Loans, a leading assumption loan lender, to understand why assumptions are a total game-changer for investors.

Unlocking Cash Flow with Low Interest Rates

One of the primary benefits assumptions offer investors is the ability to secure incredibly low mortgage interest rates that were simply unavailable through traditional financing channels.

Mike shared the story of one assumption loan client, an investor named Maria:

“Maria bought a condo about 10 years ago for like $80,000-$90,000 and paid it off. When she came to us about a year ago to buy an investment property, we initially had her pre-qualified for around $350,000. But as rates started climbing, that pre-qualification amount kept dropping to $320,000, then $300,000 and it ended up under $300,000.”

“That’s when we told her about assumptions and within a couple of months, she closed on a brand new $470,000 house in a great area of the West Valley. And her payment is the same as what a $300,000 condo would have been with a conventional loan!”

Maria’s story illustrates the power of assumptions for investors. While current mortgage rates hover between 6-7% for conventional loans, Mike said investors can assume 4% interest rate loans, some as low as 2-3%.

These ultra-low interest rates allow investment deals to pencil out and achieve positive cash flow again. As an example, Mike described an investor client who secured a $462,000 assumable loan at 3% interest to purchase a $500,000 rental property, putting just 8% down.

“With that 3% rate and loan amount, they were basically break-even on cash flow. But if they went with a new conventional loan around 7% interest, that same property would have been just a drain on cash flow each month.”

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.”

The Amortization Advantage

Beyond the obvious cash flow benefits that low mortgage interest rates provide, Mike explained that investors need to consider the advantage of assuming loans with accelerated frontloaded amortization:

“A key thing investors look at is not just the interest rate, but the total interest that will be paid over the life of the loan. With assumptions, a portion of that interest has already been paid by the previous owner. In our $500k example, the total interest owed would have been around $800k with a new 30-year loan. But taking over that assumable loan that was 3 years in, the remaining interest was only around $325k!”

By assuming existing loans, investors are skipping over the initial amortization period where the bulk of each mortgage payment is going toward interest. This allows them to build equity faster compared to starting over with a brand new 30-year conventional mortgage.

The Investment Assumption Approval Process

Of course, for investors to take advantage of assumptions, they need to go through an approval process specifically geared toward investment property guidelines. Mike explained a key difference:

“With new conventional financing, you can use projected rental income from the property you’re buying to help offset the mortgage payment and qualify. But with assumptions, you cannot use any rental income from the new subject property if you can’t show two full years of tax returns from other investment properties you own.”

This stricter investment income verification emphasizes the importance of getting pre-screened and pre-approved specifically for an assumption loan product:

“We always advise investors to get pre-screened first before even looking at assumption properties. That way they know their purchasing power based on the assumption loan guidelines upfront.”

An Assumption Loan Example for Investors

To illustrate a common scenario, Mike walked through an example:

“Let’s say the investment property is listed for $500,000 and the seller’s assumable loan amount is $400,000. As an investor, you would need to bring the $100,000 difference as a 20% down payment to assume that existing loan.”

Currently, there are limited options to finance the down payment portion for investment properties using secondary loans. But by putting 20% down, investors can take advantage of rock-bottom interest rates in the 2-4% range compared to 6-8% for new conventional loans.

For investors struggling to get deLs approved or cash flowing with today’s higher interest rates, assumptions may be the perfect workaround to revive stagnant investment portfolios.

Finding and Capturing Assumption Deals
So how can investors identify and capture opportunities using assumptions? Mike advised tapping into marketplaces like Assumptions.com to filter active listings with assumable loan products attached:

“On a site like Assumptions.com, investors can actually sort for VA loans, which can be assumed by investors as well as owner-occupants. FHA loans on the other hand require an owner-occupant, at least initially.”

From there, investors can engage specialized assumption loan lenders to fully vet the deals and get pre-approved before making offers.

“We’re really going after those emerging opportunities where maybe a home builder or developer is in a tough cash situation and is willing to facilitate assumptions to move inventory. There’s a lot of good buys for investors in that space right now.”

For investors willing to put in a bit more sweat equity, assumptions could open the door to scoring distressed or surplus inventory from sellers needing liquidity.

The Bottom Line for Investors

Given their ability to generate positive cash flow, build equity faster, and secure ultra-low interest rate financing, it’s no wonder Assumption loans are taking the real estate world by storm. Mike summed up the investor-driven mindset:

“At the end of the day, investors are always looking for deals that pencil out profitably. With rates of 3-4% and only putting 10-20% down, suddenly these investors can generate cash flow again on deLs that have been sitting on the sidelines for months or even years.”

If you’ve been awaiting a shift in the market to revive your real estate investment strategy, the rise of assumptions may be the golden opportunity you’ve been waiting for. Connect with Mike Roberts and his team at UMe Home Loans to learn more about how to leverage assumption loans to grow your investment portfolio or score your next cash flow property!

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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