Higher mortgage rates will stimulate interest in hypothetical loans.bank rate

When Tom Slattery bought a house this summer, his wish list included some normal wants and some unusual requirements.

Slattery, of course, wanted a good location and plenty of space. But he also insisted on taking over the seller’s low-interest mortgage.

As mortgage interest rate Buyers are beginning to notice lesser-known features of loans backed by the US Department of Veterans Affairs (VA), Federal Housing Administration (FHA), and the US Department of Agriculture (USDA). underwrite the seller’s mortgage.

“When we realized we could underwrite veterans loans, we were done with it,” says Slattery, an officer with the U.S. Coast Guard.

In September, Slattery and his wife closed their home in Alexandria, Virginia, and took over the seller’s home. VA loan at a rate of 2.75 percent. Slattery stepped in as the borrower and is now making monthly payments.

Had I taken out a new mortgage at that time, I would have paid close to 6.5% interest. A $535,000 mortgage at 2.75% will incur monthly payments of $2,184. Raising the rate to 6.5% jumps the payout by nearly $1,200 to $3,382.

Put another way, in order for Slattery to maintain his monthly payments of about $2,180, he would have to narrow his search to a much cheaper home with a mortgage of just $345,000.

“We’ve been very fortunate to be able to do this,” says Slattery. “We were able to achieve a better price point.”

“A very nice perk”

traditional mortgage What Fannie Mae and Freddie Mac Support It accounts for two-thirds of all US mortgages. These mortgages are not conceivable, but FHA, VA, and USDA loans are conceivable. (However, USDA loans tend to carry new interest rates when assumed in arm’s length transactions.)

Currently, mortgage interest rates are in the 7% range, house sale Some sellers and their listing agents tout notional mortgages as a way to make their listings stand out.

“Historically, assumptions have not been a widely used tool, but their activity has doubled year after year. freedom mortgage.

“Being able to provide a buyer is a very nice benefit,” he said. veterans union mortgagespecializes in VA loans.

cool concept but there are many challenges

Unfortunately, finding a list of potential mortgages is not an easy task. Slattery said he entered the phrase “VA loan” into an online search to see which sellers offered valuable perks.

For the arrangement to work, the seller must have a VA, FHA, or USDA loan at an attractive rate. Useful if the loan balance matches the buyer’s needs. The FHA requires borrowers underwriting loans to go through the same credit checks and eligibility process as the original borrower.

For Slattery, the purchase price of the home was $595,000 and the loan amount was $535,000. His down payment was enough to close the gap between the two figures.

For VA-qualified buyers envisioning a VA loan, the move is a big win. Lenders can charge him a $300 processing fee and local authorities may collect a recording fee, but no appraisal is required, he said.

However, when it comes to underwriting a mortgage, things can quickly get messy. For example, if the value of the house is much greater than the mortgage balance, the buyer can either pay the difference in cash or find a lender willing to issue a second mortgage and set up his second mortgage. is needed. lender.

On the other hand, VA rules for loan assumptions can be complex. Both Slattery and the home seller were eligible for VA loans, so the deal went smoothly, but what if the buyer isn’t in the military?

VA borrowers can allow private individuals to take over VA loans, but doing so reduces the ability of VA borrowers to take out future VA loans. Additionally, if a private person underwrites his VA loan and then defaults, the seller may lose some or all of his ability to borrow his VA loan in the future.

“Veterans learn this and think, ‘No, I don’t want to lose that benefit,'” Burke says.

Loan assumptions are still rare as these details complicate the deal. Since 2020, the Veterans Union has initiated 170,000 of his VA purchase loans, but less than 10 of those mortgages involve the assumption, Burke says.

“I think the interest will continue,” Burke says. “I don’t know if many people will make it to the finish line.”

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