When the Seller Says, ‘Please, Take My Mortgage!’

Key takeaways:

• A mortgage assumption takes place when the buyer takes over the seller’s existing mortgage at closing in lieu of getting a new loan.  
• Currently, the only loans with a standard qualifying assumption clause are VA, FHA and USDA loans.  
• Veteran-to-veteran assumptions of VA loans allow buyers to substitute their VA entitlement onto the loan and release the seller’s entitlement for use on a future VA loan.

When interest rates rise, buyers are often forced to make hard choices about the cost of housing. Higher rates, coupled with the significant rise in home values over the last few years, have forced many buyers out of the homebuying market entirely. 

However, one segment of the real estate market—the mortgage assumption market—has the potential to outperform the rest. Smart agents can leverage their knowledge to bring some payment-sensitive clients back into the hunt for a new home.  

A mortgage assumption takes place when the buyer takes over the seller’s existing mortgage at closing in lieu of getting a new loan. Currently, the only loans in the market with a standard qualifying assumption clause are VA, FHA and USDA loans.  

Deborah Baisden, CRS, GRI, a sales associate with Berkshire Hathaway Home Services in Lynnhaven, Va., has seen an uptick in VA assumptions in her market. “About 22% of our population is military,” she says.  

When Baisden started in the business in 1989, assumability was very desirable, “but it was a fairly lengthy process. They’re expediting it now.” She recently closed a sale in which a veteran buyer assumed a 3.5% loan. The sale closed in 45 days.  

“Many of these loans were originated or refinanced after March 2020 and carry extremely low interest rates and payments,” says Craig O’Boyle, broker-owner of O’Boyle Real Estate Group in Colorado Springs, Colo. 

Listing agents selling these properties still need to focus on the traditional big three marketing items— location, home features and the overall condition of the home—but they should also be marketing the savings buyers can realize if they qualify to assume the existing low-rate mortgage, O’Boyle says. Assuming a $300,000 loan at a 2.5% interest rate versus getting a new loan at a 6% interest rate represents $614 per month in savings.  

For most real estate professionals, there’s an education gap regarding mortgage assumptions, says O’Boyle. That’s understandable considering assumptions haven’t been common since the 1980s, a decade when interest rates averaged 12.7%.  

Like Baisden’s market, the Colorado Springs area is home to a number of military bases, as well as the U.S. Air Force Academy—and interest in VA assumptions started to pick up in 2022. Bill McAfee, president of Empire Title in Colorado Springs, saw assumable purchase contracts coming into the office. “But there was no real clarity in the agent community on how to complete one successfully,” he says.  

McAfee and O’Boyle, who’s been in the business 27 years, teamed up to create Assumption Solutions, focused on helping agents get buyers and sellers through a VA mortgage assumption. O’Boyle says agents should know these important points about mortgage assumptions. 

• VA, FHA and USDA mortgages all carry a qualifying assumable clause, which means any owner-occupant buyer can qualify using the same standard the loan was issued under with the existing mortgage servicer. Investors cannot assume these loans. 
• VA loans can be assumed by both veterans and non-veterans. Veteran-to-veteran assumptions allows the buyer to substitute their VA entitlement onto the loan and release the seller’s entitlement for use on a future VA loan. Veterans who allow an assumption by a non-veteran leave their entitlement behind until the loan is paid off—while others will only sell veteran-to-veteran. The FHA & USDA have no such entitlement issues. Each circumstance is different. In all cases, sellers should have qualified legal counsel to ensure they aren’t liable if buyers default on the mortgage.  
• Assumption Solutions refers to the difference between the purchase price and the assumable mortgage amount as the “assumption gap.” In theory, that gap could be financed but, since buyers are being qualified by the existing mortgage servicer, any additional financing may affect the buyer’s ability to get approval to take over the mortgage. O’Boyle says, for almost all the files processed by Assumptions Solutions so far, the gap has been covered with a cash down payment. Every buyer who has tried to finance the gap has been denied by servicers. 

In Baisden’s sale, the veteran buyer brought $25,000 in cash to the close. When buyers bring a hefty sum of cash to closing, Baisden reminds them that future value is never certain. “We’ll see some growth in assumptions if sellers are realistic and bought before the big runup,” she says. “I always caution people who bring cash that there’s no guarantee they can get that cash back out when we sell.” 

To help real estate practitioners understand the many nuances of marketing assumable assets, Assumption Solutions is offering webinars, podcasts and local training to agents across the country.  

“We are seeing demand for assumptions grow exponentially,” O’Boyle says. “Although most of our activity is in the Colorado Springs area, we’re currently processing deals from Alaska to Florida.” In the process, he and McAfee are not only serving agents but also easing the process for servicers who aren’t up to speed on the process. “In many cases they’re giving incorrect information to consumers,” O’Boyle says, “and we help combat the errors.”