The Assumable Mortgage Trend and Other Ideas to Increase Home Ownership in America

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Commentary 

What’s going on with the U.S. housing market?

Sales are low or stagnant in many areas, sending prices southward. Yet nationally, the housing market is nowhere near where it should be at this time of year. There are a few very good reasons for this.

The High Price and High Interest Rate Trap

High interest rates and higher home prices have hit the housing market with a double whammy, leaving both home buyers and home sellers between a rock and a hard place. For buyers, interest rates have doubled and home prices have increased by 50 percent since 2022, pushing houses that were once within reach just two years ago completely out of reach today.

Sellers, on the other hand, find themselves trapped in homes that have risen in price far above what they paid for them and paying monthly payments on mortgages in the 2 to 3 percent range. In short, sellers can’t afford to sell because they can’t afford to buy at today’s elevated prices and mortgage rates.

Lack of Affordability–Not Demand–Is Hindering Sales Activity

Today, the housing affordability index, which is made up of three factors—buyer income, interest rates (the cost of money), and housing prices—is the lowest it’s been in a decade. All three factors have a considerable impact on each other and the affordability index. Over the past several years, both the cost of money (interest rates) and homes have far outpaced income increases, so housing affordability is much less today than it was just a couple of years ago.

The reasons for higher home prices include higher construction material and labor costs and a shortage of housing due to higher regulation. Disruption in supply chains has driven material costs higher, while in some states, minimum wage laws as well as inflation have driven labor costs up.

In short, it’s not a lack of housing demand that’s slowing the housing market, but a lack of affordability for both buyers and sellers.

Enter Assumable Mortgages

That’s where creative financing is helping out. As noted above, one of the biggest factors affecting housing sales is mortgage interest rates. But to get around the higher rates, which now hover in the 7 percent range, buyers and their agents are looking to put deals together with assumable mortgages.

Assumable mortgages are mortgages that were taken out at an earlier time, when mortgage rates were in the 2 to 3 percent range. To facilitate the sale of their home, sellers may agree to let the buyer(s) assume or take on their current, low-rate mortgage, and make up the difference in both already-paid mortgage payments and increased value by coming into the sale with more cash than the normal amount, which can range from 3 percent to 20 percent down. That way, the new buyers are able to get into the property with a low-interest mortgage that makes monthly payments affordable.

Typical loans that are assumable include USDA, FHA, and VA loans, but only if certain financial qualifications are met. For assumable VA loans, the buyer does not have to be a military member. But buyers must still qualify for the mortgage in order to assume it. Similarly, other lenders may allow an existing loan to be assumed by a new buyer, but all buyers must still meet the qualifying conditions within the original loan agreement. But conventional lenders are often less willing to allow an existing home loan to be assumed by a new buyer and have included non-assumable language within the loan agreement.

But More Cash May Be Necessary

Even when buyers find a home for sale with the assumable mortgage option available, coming up with a much bigger down payment can be a big obstacle to closing the deal. One creative way around that is to take advantage of down payment assistance that may be available in your state or municipality. Qualifying terms vary, so it’s not a slam dunk for all borrowers, by any measure.

If down payment assistance is not on offer, you can take out an unsecured personal loan of, if available, a secured loan collateralized by a certificate of deposit, a car, or even a loan from life insurance or a retirement plan. Some or all of these options will be available to some borrowers and not to others, on a case-by-case basis. If using a personal loan as a down payment, it’s a good idea to get that loan at least three months before making an offer on a property, so that it is “seasoned” with verifiable payments, showing that a buyer has enough monthly income to qualify for the mortgage payment as well as the debt service on the personal loan.

Another down payment source could be a relative who is willing to take out a home equity line of credit (HELOC) or second mortgage to help you come up with the cash needed, with the proviso that you take out a HELOC once the deal closes and pay the relative back.

Seller Financing Making a Comeback

Seller financing is another option that is being seen more often in housing sales transactions these days. In those instances, the seller may own most, if not all, of the house outright and prefer to have the monthly income that comes from a buyer’s monthly mortgage payment. The advantage to the buyer is that the seller, not a financial institution, is setting the terms to qualify for the financing. That can make all the difference in the deal if the buyer’s credit rating is less than stellar.

The advantage to the seller, of course, is that the seller sets the interest rate and other terms of the loan. If the buyer defaults on the loan, the property reverts back to the seller, who gets the benefit of all the monthly mortgage payments the buyer has made in the past. With more buyers in the market who may not qualify for conventional financing, seller financing can be the key to getting back on the property ladder.

Multiple Buyers Are Also Showing Up

Another way to solve the home purchase puzzle is to combine the purchasing power of multiple buyers on a single property. It may be a cosigning relative, or it may be friends or family members who plan to live in the house or at least share ownership, equity, and appreciation. In any case, leveraging the power of multiple buyers isn’t new, but it is a great way for buyers to get into a property that they can’t qualify for on their own.

All of these ideas have been tried and tested, but not every option is right for every buyer or seller. The good news is that home ownership can be increased in the United States through these and other creative financing strategies.

The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.