Will Assumable Loans Save Us All?

Well, hello everybody there and welcome to a another episode of Real talk. I'm your host, Stephen Meade. I'm the managing broker here at domicile real estate where we are on a mission to help California's renters become homeowners. And before we begin with our topic this week, just a short little commercial, we are doing a webinar on low downpayment investment options. So if you'd like to own a multi unit property, and you do not have a big down payment, we're actually doing a webinar on that. It's a short webinar 25 minutes plus some time for questions. It's on the 28th. And we have a sign up link down below in this video. So definitely check that out if that is something of interest to you. 

So we're going to talk about assumable loans that are assumable loans going to save us a hole. And it's really the idea for this came out of a conversation I had last week with some other real estate professionals I know who are in leadership positions with the California Association of Realtors, and we were talking about ways to address really, what is this the second act of a long term inventory crisis that we're in, in what I'm talking about is we have a ton of people who obtain mortgages at very low interest rates. And what that means is none of these people want to give those interest rates up, hence, those homes are not going on to the market. So the question is, we really have two problems today, right?

Problem number one is that we have sellers who don't want to put their homes on the market because they don't want to give up a low interest rate. And problem number two, is that we have buyers facing reduced affordability, because the interest rates are higher. And so what is an assumable loan, an assumable loan is exactly what it sounds like. And what you might guess it means that you can take over the payments of somebody else's loan. So for example, if someone had a mortgage at three and a half percent interest, you could buy their house and just take over their loan, replacing their name with your name on the loan, and you would have a three and a half percent mortgage, and then you would get a second mortgage for the difference between that loans value and the total value of the property. And this sounds great in theory, and the issue that we have here in Southern California, is that not very many loans are eligible for assumability.

So really, there's there's only three types of loans really that are affordable, or that are doable as assumable loans. Number one is FHA loan. So if someone has an FHA loan, generally these loans are assumable. The second category are VA loans, right, or Veterans Affairs loans. Now you do have to have a buyer who is a veteran to be able to assume that loan. So that's the second category. The third category is conventional loans, but only Adjustable Rate conventional loans, and only after the fixed rate period. So for example, if someone had a five, one arm loan, that would only be assumable, once you would pass through that five year time period, there are some exceptions to that. But generally those loans are not very easily assumable.

So one of the big problems we have is we just don't have that many loans that are assumable. There are a number of groups working on this. And I actually have some faith that there might be some movement on this in the next, say, 36 months, we may find that there becomes an assumability option for a fee with some of the lenders. And I think at first that sounds preposterous. Why would a lender allow this? Why would they allow somebody if interest rates were at 6% to keep having a three and a half percent mortgage? Well, it's pretty simple. I think they realize that because of the interest rate market. If that person is not able to sell their home with an assumable loan, they won't sell it at all. So keep having that loan either way.

And I think some lenders may look at this as a chance to actually earn some additional profits by charging a fee. That is a long ways off. So I don't expect that to come into play here shortly. But the other reason that this is important is not just because this reduces if you're a buyer, and suddenly you can buy a home that has an assumable mortgage and end up with a lower interest rate. For example, in our daily architectural email. We are actually featuring a home today that has an assumable loan of 3.25%. So these houses are out there, right? These loans. They're rare, but they do exist. But the second thing is this really gives us an opportunity to free up some inventory and I think the biggest challenge that our market is facing in the next five years yours is that we just won't have enough inventory to satisfy demand.

This lack of inventory is the reason why the market hasn't adjusted prices to coincide with interest rates. It's the reason why for people who are waiting, they're kind of staring on in horror as prices are now beginning to rise again, in many markets. So this will solve a lot of those problems. But I don't know if that solution will come fast enough. So we're actually looking to put together either another video or maybe do a webinar on this and what we're calling a homebuyer hacks, which is just kind of a series of kind of our best little tricks that we know. And of course, not every trick is going to be appliable to every house, that kind of or appliable to every situation. But we're going to try to put together kind of a list of all these things.

How does an assumption work? What do you need to look for if you're looking for homes with assumable loans? By the way, if you're a seller out there, and you're watching this and you have an FHA mortgage, you have something of value. And if you are working with an agent who does not know that you are leaving money on the table, buyers will pay higher for a home with an assumable loan. So if you are thinking about selling and having a superb load, you want to work with someone who understands that knows how to value that and knows how to market and sell that to buyers and show how they can have a benefit and they should be willing to pay a higher price for your home.

Anyhow, that's all I've got for you this week. I hope you've enjoyed this episode of Real talk. Don't forget to like subscribe and hit that notification bell. Also, don't forget we do have that webinar on low downpayment investing in multi unit property. So if you'd like to buy a multi unit property and you do not have a huge downpayment. We actually have a webinar for you. The signup link is down below in the description. We'll see you again real soon.