Real estate prices were already high when Ellen Harper, an Atlanta-based software architect, began looking for a home in 2021. But she couldn’t foresee the rapid rise in interest rates the following year, and even with a large down payment, new math made her uneasy.
But earlier this year, she came across what seemed like a portal into the not-so-distant past: listings of thousands of homes that come with a low-interest mortgage that can be transferred from the existing homeowner to a new homebuyer as an acceptable mortgage.
Ms. Harper, who is in her 50s, managed to secure one of these homes, closing on a four-bedroom brick colonial-style home in Fairburn, Georgia, two weeks ago for a monthly payment of $1,400. She can comfortably afford this amount until retirement, especially thanks to a mortgage interest rate of 2.49 percent. That’s less than half the current rate of 7.09 percent for 30-year fixed loans, the most popular type of mortgage.
“I didn’t want to take out a bad mortgage and end up in a situation where all I could do was pay the mortgage,” Ms Harper said. She found her home through Roam, a startup that launched in September that lists homes with likely low-interest loans and helps buyers through the process. “There were other houses – they were nice and everything,” she added, “but I went with the lowest price I could find.”
Assuming a mortgage isn’t a gimmick; This is a built-in benefit with certain government-backed mortgages, provided the new owners qualify. The process won’t work for all potential buyers as they may have to jump through several hoops before they can get the keys, often including a large deposit. For home sellers, it can be advertised alongside marble countertops to attract more potential buyers.
Finding an affordable mortgage
Last popular in the 1980s when mortgage rates topped 18 percent, many real estate professionals are unaware that transferable mortgages are even possible. However, as mortgage rates continue to rise, word is spreading. Realtor.com, a real estate listing website, recently began tagging supposed properties and making them searchable. And more and more companies — from small bootstrapped operations to startups like Roam — are seizing the opportunity, creating lists or maps of suitable properties and charging homeowners a fee to help them navigate this potentially nerve-wracking adoption process.
According to Intercontinental Exchange, a data and technology company, an estimated 12.2 million loans, or 23 percent of active mortgages, are eligible, but most conventional mortgages (which make up the majority of existing loans) are not. It is a built-in feature in mortgages backed by the Federal Housing Administration and often used by first-time home buyers and Department of Veterans Affairs mortgages.
The number of closed acceptances represents only a fraction of all home sales, but it is growing. More than 6,000 assumptions were completed in 2023, 139 percent more than in 2022. This year, 3,896 assumptions have already been completed.
Many homeowners with low-interest loans probably aren’t quite ready to give them up: Nearly two-thirds of likely mortgages with interest rates below 4 percent were taken out within the last three and a half years, according to Black Knight.
When trying to get a mortgage, several stars need to match. Because many homes have risen in price quickly and the loans taken out have been partially repaid, there can be a significant gap between the purchase price and the remaining mortgage. That means potential homebuyers may need large down payments or at least qualify for a second mortgage that comes with a much higher interest rate.
Another hurdle is finding a seller willing to accept such an offer and hoping that the mortgage servicer holding the loan – which pays much less than for a typical new mortgage – processes the acceptance in a timely manner.
Several new companies are trying to make the process easier, including Roam, which recently received a $3 million investment led by venture capital firm Founders Fund and DoorDash CEO Tony Xu, among others.
Roam operates a site similar to Zillow’s, except that all listings, currently located in 18 cities in seven states, have prospective mortgages under 6 percent and are large enough to cover at least half the purchase price.
The company has worked with real estate agents who are knowledgeable about possible loans in the markets in which it operates. Its transaction coordinators will call the mortgage servicer – the company that manages the loan – until the transaction is completed. Roam’s help doesn’t come cheap: It charges 1 percent of the home’s sale price, for example $4,500 for a home valued at $450,000. Buyers only pay when the deal closes.
In Ms. Harper’s case, her agent submitted her offer five times because the seller and his agent were quite skeptical. That’s when her real estate agent, Kevin Hosner of Chapman Hall Realtors in Atlanta, got creative. They promised to pay the seller $2,000 more if they didn’t close within 60 days. Roam used this as inspiration for a new guarantee: If the acceptance is not processed within 45 days, the company will pay the homeowner’s mortgage pro rata until it does. Ms. Harper ultimately paid $357,000 with a down payment of about $170,000.
“Just because it’s technically acceptable doesn’t necessarily mean the seller is willing to do it,” Mr. Hosner said. “It’s not as fast as a cash offer that closes in two weeks.”
Mr. Hosner, a former pastor at the church, has completed dozens of supposed transactions and has a preacher’s passion for spreading the word about their availability. But not all agents want to deal with the additional hassles, and many buyers have trouble with mortgage servicers or lenders when processing assumptions. Prospective mortgage closings can take anywhere from 45 to 90 days or longer, while purchasing a home with a new mortgage generally takes about a month to 45 days in many parts of the country, mortgage brokers said.
“Service providers have been very reluctant to do it,” said Ted Tozer, a non-resident fellow at the Urban Institute’s Housing Finance Policy Center. “They are actually losing money every step of the way because they incur significant costs that are not covered by the fee they can charge.”
Both the FHA and VA have set caps on how much mortgage servicers can charge for assumptions.
Run the numbers
For buyers, finding low interest rate mortgages seems like a no-brainer. But there’s a lot to consider, including the prospect of qualifying for a second mortgage, which could potentially thwart the closing process or derail the deal altogether.
Raunaq Singh, Roam’s chief executive, said the uncertainty of securing a second loan was a common stumbling block – some mortgage servicers who had the prospective loan would extend additional loans, but not always. To address the issue, Roam recently began working with Spring EQ, a nationwide lender that provides second loans to Roam customers with a credit score of at least 640 and a down payment of at least 15 percent. “Now they can buy any house and not have to worry,” Mr Singh added.
Consider a home that costs $400,000 with a projected mortgage of $280,000. The home buyer would need to come up with $120,000 to close the gap, either with cash or loans. A buyer who puts down 20 percent, or $80,000, will still need another $40,000 plus closing costs.
Here’s the math: The home buyer’s total monthly payment would be $1,761, compared to $2,237 per month for a new mortgage with an interest rate of 7.5 percent. This includes an expected mortgage payment of $1,230 (at an interest rate of 3 percent) and a second loan of $336 (at an interest rate of 9.5 percent), according to Roam’s calculations.
Included in the monthly payment are other ongoing costs: With FHA loans, the homebuyer would also have to pay a $194 mortgage insurance premium, an FHA program fee to cover the lender’s losses if the borrower defaults.
Mortgage insurance typically covers the risks associated with a low down payment. But again, borrowers who put down a lot of money will have to pay the fee – most likely 0.80 percent of the loan balance per year, divided and paid monthly – for the entire term of the loan, although there are exceptions.
People who take out VA loans must pay a one-time fee of 0.50 percent of the loan amount to the agency, but there are no ongoing insurance costs. However, there are other limitations. If a non-veteran buyer assumes the mortgage, the seller could lose all or part of his or her eligibility for another VA loan until the old loan is paid off.
Nevertheless, it is worthwhile for many prospective buyers.
Ryan Carrillo was one of many homeowners who wanted to move but didn’t want to return his 2.75 percent mortgage.
When he learned that his FHA-insured mortgage was deductible, he thought he might try to find another one. But he quickly became frustrated trying to find supposed entries.
“I thought to myself, ‘We’re now in a world where the underlying mortgage is more valuable than the property – surely there has to be a way to do something with it,'” he said.
This led to an idea that he shared in a text message with an entrepreneur friend, Louis Ortiz. In August, the two introduced Assumable.io, a small homegrown company. It now includes a website with 26,000 active listings and charges $1,850 to help would-be borrowers with the process that Mr. Carrillo will undertake for his own family. He and his wife, who had their first child in January, are moving from Phoenix to Texas to be closer to relatives.
He has no plans to pass on his mortgage to his buyer – he fears it will take too long to complete given his impending move.
The mortgage he’s taking on has an interest rate of 4.87, which is a savings of more than $400 per month than if he had taken out a new loan at the 7.12 percent he quoted.
“Assumables are a time machine from the low interest rates of the past,” he added. “When I ran the numbers,” he added, “it was a no-brainer.”
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2024-05-09 19:21:51
www.nytimes.com
