Tired of waiting for rates to come down? There's another way in: assumable loans. Here's what they are, how they work, and a real example with real numbers so you can see exactly what it looks like.

What Does Assumable Mean, Anyway?

Government-backed loans may be assumable. That means someone else (a first-time homebuyer, maybe you) can take over the seller's existing loan.

This is not one of those sketchy 'subject to' deals where you pinky promise to make the seller's payments. With assumable loans, you actually go through an approval process with the existing lender or servicer. If you qualify, the current owner gets released from the loan, and you step in and pick up right where they left off.

A Real Example: Buying in Feb 2022

Let's pretend this person bought in February of 2022. If you check Freddie Mac's historic rate chart, Feb 2022 was a great moment on there. It was right before rates went poopy.

I love the idea of a Feb 2022 loan. Someone might've bought at the peak price, but right before rates spiked.

Here's a hypothetical. Pretend the seller bought at $400,000 in Feb 2022 at a 3% interest rate. This seller used an FHA loan with 3.5% down. Throw in the upfront mortgage insurance premium (1.75% financed) and you're looking at a loan balance of $392,755.

The minimum principal and interest payment on that loan would be $1,655.87.

Side note: how 'bout that payment, am I right?

The Amortization Schedule

If the seller only made minimum payments, here's what the loan balance looks like over time.

Year 1

  • Month 1: Interest $981.89, Principal $673.98, Ending Balance $392,081.02
  • Month 2: Interest $980.20, Principal $675.67, Ending Balance $391,405.35
  • Month 3: Interest $978.51, Principal $677.36, Ending Balance $390,727.99
  • Month 4: Interest $976.82, Principal $679.05, Ending Balance $390,048.94
  • Month 5: Interest $975.12, Principal $680.75, Ending Balance $389,368.19
  • Month 6: Interest $973.42, Principal $682.45, Ending Balance $388,685.74
  • Month 7: Interest $971.71, Principal $684.16, Ending Balance $388,001.58
  • Month 8: Interest $970.00, Principal $685.87, Ending Balance $387,315.72
  • Month 9: Interest $968.29, Principal $687.58, Ending Balance $386,628.14
  • Month 10: Interest $966.57, Principal $689.30, Ending Balance $385,938.83
  • Month 11: Interest $964.85, Principal $691.02, Ending Balance $385,247.81
  • Month 12: Interest $963.12, Principal $692.75, Ending Balance $384,555.06

Year 2

  • Month 13: Interest $961.39, Principal $694.48, Ending Balance $383,860.58
  • Month 14: Interest $959.65, Principal $696.22, Ending Balance $383,164.36
  • Month 15: Interest $957.91, Principal $697.96, Ending Balance $382,466.40
  • Month 16: Interest $956.17, Principal $699.70, Ending Balance $381,766.69
  • Month 17: Interest $954.42, Principal $701.45, Ending Balance $381,065.24
  • Month 18: Interest $952.66, Principal $703.21, Ending Balance $380,362.03
  • Month 19: Interest $950.91, Principal $704.97, Ending Balance $379,657.06
  • Month 20: Interest $949.14, Principal $706.73, Ending Balance $378,950.34
  • Month 21: Interest $947.38, Principal $708.50, Ending Balance $378,241.84
  • Month 22: Interest $945.60, Principal $710.27, Ending Balance $377,531.57
  • Month 23: Interest $943.83, Principal $712.04, Ending Balance $376,819.53
  • Month 24: Interest $942.05, Principal $713.82, Ending Balance $376,105.71

Year 3

  • Month 25: Interest $940.26, Principal $715.61, Ending Balance $375,390.10
  • Month 26: Interest $938.48, Principal $717.40, Ending Balance $374,672.71
  • Month 27: Interest $936.68, Principal $719.19, Ending Balance $373,953.52
  • Month 28: Interest $934.88, Principal $720.99, Ending Balance $373,232.53
  • Month 29: Interest $933.08, Principal $722.79, Ending Balance $372,509.74
  • Month 30: Interest $931.27, Principal $724.60, Ending Balance $371,785.15
  • Month 31: Interest $929.46, Principal $726.41, Ending Balance $371,058.74
  • Month 32: Interest $927.65, Principal $728.22, Ending Balance $370,330.51
  • Month 33: Interest $925.83, Principal $730.04, Ending Balance $369,600.47
  • Month 34: Interest $924.00, Principal $731.87, Ending Balance $368,868.60
  • Month 35: Interest $922.17, Principal $733.70, Ending Balance $368,134.90
  • Month 36: Interest $920.34, Principal $735.53, Ending Balance $367,399.37

Year 4

  • Month 37: Interest $918.50, Principal $737.37, Ending Balance $366,661.99
  • Month 38: Interest $916.65, Principal $739.22, Ending Balance $365,922.78
  • Month 39: Interest $914.81, Principal $741.06, Ending Balance $365,181.71
  • Month 40: Interest $912.95, Principal $742.92, Ending Balance $364,438.80
  • Month 41: Interest $911.10, Principal $744.77, Ending Balance $363,694.02
  • Month 42: Interest $909.24, Principal $746.64, Ending Balance $362,947.39
  • Month 43: Interest $907.37, Principal $748.50, Ending Balance $362,198.88
  • Month 44: Interest $905.50, Principal $750.37, Ending Balance $361,448.51
  • Month 45: Interest $903.62, Principal $752.25, Ending Balance $360,696.26
  • Month 46: Interest $901.74, Principal $754.13, Ending Balance $359,942.13
  • Month 47: Interest $899.86, Principal $756.02, Ending Balance $359,186.12
  • Month 48: Interest $897.97, Principal $757.91, Ending Balance $358,428.21

Months 49 Through 54

  • Month 49: Interest $896.07, Principal $759.80, Ending Balance $357,668.41
  • Month 50: Interest $894.17, Principal $761.70, Ending Balance $356,906.71
  • Month 51: Interest $892.27, Principal $763.60, Ending Balance $356,143.11
  • Month 52: Interest $890.36, Principal $765.51, Ending Balance $355,377.59
  • Month 53: Interest $888.44, Principal $767.43, Ending Balance $354,610.17
  • Month 54: Interest $886.53, Principal $769.35, Ending Balance $353,840.82

I'm stopping at 54 months, because if you buy in Feb 2022, the seller's first payment is likely April or May 2022 depending on when the seller closed.

I didn't even mention: you get an awesome head start on your mortgage. You're already four years in, and a huge chunk of interest has already been paid.

Alright, roughly $353k owed.

The Gap in Financing

Maybe the seller has it listed for $400k, thinking 'well, I bought it at $400k, I know it was peak, but darn it, I don't want to lose money here, and I have to pay the agent too.'

There's a difference between the $400k and the $353k, and that's $47k.

If you have $47k, you don't need much else. I can't quote assumption fees because I don't process assumptions, but you sure don't need to pay origination fees. The loan has already been originated.

That $47k gap is what the seller walks away with, after paying whatever the seller agreed to pay in agent fees.

Not sure how much home you can afford in the first place? Run your numbers on the affordability calculator before you start hunting for assumables.

Sounds Too Good to Be True?

Here are a couple things that aren't as rosy about assumptions:

  • They can take a while. They aren't a priority. I imagine lenders would rather keep these low rates off their books. I've seen some people say about three months, but one of my agent friends said it only took a month for her client. Sounds like an exception to me though.
  • You can't use your favorite loan officer. You work directly with the seller's mortgage servicer. Your mortgage person will cry about it because he probably works on commission.
  • The seller has to agree to it. You can't do a hostile takeover assumption. I'm the captain now doesn't fly here.
  • The seller might not qualify. The seller might say 'oh yeah, it's FHA, totally assumable,' but if the seller has made any late payments in the last 12 months, it may disqualify the mortgage from being assumed.

What About the Full Payment?

So we figured out the principal and interest portion with a basic p/i calculator. But you also need to pay escrow:

  • Property taxes
  • Homeowners insurance
  • Mortgage insurance

Mortgage insurance was a little more expensive before the Biden-Harris team lowered the annual MIP from .85 to .55. So we'll need to roll with the .85 rate here. I'd guess that would be around $278 per month.

Want to see the full picture, payment plus closing costs, side by side? Plug your numbers into the payment and closing cost calculator.

How to Find Assumable Loans

Listing agents should post that a home is assumable, and your agent should be able to search and filter for those.

So talk to your agent about this. Please.

But here's another catch. Listing agents can miss it. And they do. They might not even know their client has an assumable mortgage. So if nobody knows, you won't be able to find it.

Unless...

A Tool I've Been Working On

Head to search.newbhomebuyer.com, click all homes, click on the filter, then click the assumable loans only toggle.

From there, you can determine the interest rate you want to stay under (estimated based on historic averages) and how much cash you can provide for the gap in financing.

And boom. All government-backed mortgages that might be assumable, with an estimated rate under your target, using public record to estimate it all.

One more catch. It's only available in Utah right now because that's the only MLS I have access to (Florida and NC might be next because of the low barrier to entry). I'm sure there's a service out there that makes you pay money for something like this in your state.

Bottom Line

Talk with an agent about assumable loans. If you want to walk through whether this strategy could work for you, grab a free planning session and we'll dig into your numbers together. Good luck out there, hope it helps.

Sam

Skip the Rate Wait: How Assumable Loans Work
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Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.