Money Rehab with Nicole Lapin - Assumable Mortgages: The Housing Hack That Will Save You Big

Episode Date: August 22, 2023

Assumable mortgages are becoming everyone's favorite house-buying hack. Here's what they are, and how to get one. Want to start investing, but don't know where to begin? Go to moneyassistant.com and meet Magnifi, your AI money assistant, designed to help you make a plan for your financial goals. Want one-on-one money coaching from Nicole? Book a meeting with her here: intro.co/moneynewsnetwork 

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. If you've been looking to buy a house lately or if you're selling one, you've probably heard the term assumable mortgage drift into the narrative, which may have you asking WTF an assumable mortgage is and if it could help you finally score the house of your dreams. And if you're on the other side of the equation and you're selling, could assumable mortgages have the potential to help you get

your asking price in slower markets where buyers are more reluctant to take on mortgages with these new higher interest rates? Finally, if you're dealing with a divorce involving a mortgage or an inheritance involving a mortgaged property, this could come into play for you as well. Assumable mortgages are as hard to find as the perfect flattering bathing suit, but they are out there and they could help you out no matter what side of the mortgage you're on. First, let's define the term assumable mortgage. Very simply, assumable mortgages are ones where the buyer assumes or takes over the existing mortgage on the property, which is great for the buyers because they can get a mortgage with an

older, lower rate. But don't get too excited because that doesn't cover the full purchase price of the property. I'm going to use some very rough numbers to explain this using an imaginary home with a current asking price of $450,000. The sellers, let's say, bought the house for $400,000 in 2020, and their mortgage rate was 3%, far lower than the current 7-ish percent. They paid $24,000 over the life of the mortgage. Let's just assume there was a zero down payment. So the balance there is $375,000. Now, remember, the asking price of the house is $450,000, while the outstanding balance on the mortgage is $375,000, $350,000, while the outstanding balance on the mortgage is $375,000, leaving the difference of $75K. If the buyer can assume the remaining balance of the mortgage at the original rate,

they would still have to cover the difference which they can do in cash or a second mortgage, which would be at the current rate. So what does the seller get out of this deal? The seller walks away with equity in the house, same as any other house sale. Quick dictionary note here. Equity is the value of something after you pay off all the debts. If you were the seller in this situation, your equity in the house would be the current value of the house minus the outstanding mortgage, or 75K. In a traditional selling situation, you walk away with the same amount, the sale price

of the home, minus the remaining balance on the mortgage. The difference here is instead of the old mortgage being paid off at closing with proceeds from the sale, now the mortgage is transferred to the new owners. The benefit to the buyer is that sweet, sweet low interest rate mortgage, and in some situations, a smaller down payment than would normally be required. Also, closing costs are usually lower all around due to the type of loans that allow assumable mortgages. Because if you're thinking, Lappin, this sounds perfect. Why doesn't everybody do this? The answer is simple. There are only a few types of home loans that offer the option

to the buyer to assume the seller's loan. Generally speaking, assumable mortgages are those backed by the federal government and not from private lenders. Some very few private lender backed loans are assumable, and usually those are only adjustable rate mortgages, which remember how adjustable rate mortgages work. They fluctuate based on market rates and conditions, kind of making them useless to the buyer in this situation because they'll just end up paying the current rate, which is what the buyer is trying to avoid with this whole assumable mortgage situation in the first place. Broadly, there are three types of eligible loans, all from the government. And it is, as usual, an alphabet soup.

Eligible loans are FHA, VA, and USDA loans. FHA loans are backed by the Federal Housing Administration. They're aimed at helping people become homebuyers, not making this huge profit for the lender. They're available for first-time homebuyers and seniors. The down payment can be as little as 3.5% and they limit closing costs. In order to assume these types of loans, the buyer has to qualify. If you're a first-time homebuyer who meets the other general criteria like credit and income level, then congrats, you're in. But if you're buying the house as an investment property, then you won't be able to assume this loan.

VA loans are backed by the Veterans Administration. These loans are only available to veterans, service members, and their surviving family members. But if you qualify, these loans are packed with juicy extras like generally no down payments, limited closing costs, lower interest rates, zero need for private loan insurance, and no limit on the number of times you can take them out as long as you qualify. Now, remember how with the FHA loans, you need to match the same profile as the original borrower? This is not the same case with the VA loans. The buyer doesn't have to be a veteran service member or surviving family member to take over these loans. Finally, USDA loans are backed by the U.S. Department of

Agriculture to help low-income families afford homes in rural areas. These loans are only available in certain zip codes. There are income restrictions, and the house must be used as the buyer's primary residence. As long as the seller is up to date on mortgage payments, then USDA loans can often be assumed by the buyer. All right, so far we've discussed the official process in which the buyer is approved by the lender and officially takes over the loan. The buyer also has to meet some requirements for the available type of loan, including a credit check and all the normal stuff that comes along with taking out a mortgage in the first place. Once they qualify, the buyer is officially, legally on the old loan, and the lender terminates the seller's responsibility for the remaining balance of the loan.

Some of you might be wondering about just taking over the loan in a more casual manner, with the new occupant making mortgage payments on behalf of the original owner. Clever, but terrible idea for many reasons, including the simple fact that many mortgage lenders require the mortgage holder to physically occupy the property. However, this situation often does come up during divorce, when one partner moves out of the home or one partner dies. In that situation, mortgage assumption can be a great option for the partner remaining in the house. But even then, not all mortgages are assumable, and the partner who wants to take on that mortgage

obligation alone is going to have to reapply for the mortgage as a single person. But if available, it can be a great option. For today's tip, you can take straight to the bank. If you're looking at a house right now that you know will be your forever home, but the current interest rates have you hesitating, look into buying mortgage points that reduce your interest rate. These are upfront fees that you have to pay to get a lower interest rate. They can cost a lot and they don't pay off for years, so it really only makes sense if you know you're staying put. But this is one situation where spending extra money upfront can save you a bundle down the road. Money Rehab is a production of Money News Network.

I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.