Squeezed by soaring mortgage rates and record-high home prices, home buyers are looking for a break.
More buyers are discovering cheap financing through a once-obscure workaround: portable mortgages. These loans allow borrowers to take over or assume the seller’s mortgage. But there’s a caveat: This option is only available for loans guaranteed by government agencies such as the Federal Housing Administration (FHA) and the Veterans Affairs Department (VA).
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The number of sales closed with this financing, while still low overall, has exploded. In 2023, 3,825 FHA loans were originated, compared to 2,221 in 2022. In the first five months of 2024 alone, 3,477 additional FHA loans were registered, putting borrowers on track to more than double last year’s total.
VA loan assumptions saw an even bigger jump, from 308 in 2022 to 2,244 in 2023. This category appears poised to more than double that total this year, with 1,457 assumptions recorded in the first three months of 2024.
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What are portable mortgages?
Transferable mortgages are government-backed loans that the seller can transfer to the new owner when selling a property.
This means the new owner is responsible for the remaining mortgage payments, loan balance, payment schedule, interest rate and escrow account under the same terms, said Kelly Zitlow, executive vice president of sales and marketing and senior mortgage advisor at Cornerstone Home Lending.
Chris Birk, vice president of Mortgage Insight at Veterans United Home Loans in Columbia, Mo., said he’s hearing that more “home buyers and sellers are talking about portable loans,” and that about 4 in 5 active VA mortgages have an interest rate below 5 percent.
That’s still a tiny fraction of total home sales. In 2023, more than 4 million existing homes were sold nationwide, according to the National Association of Realtors. But the rise in portable mortgages shows growing interest among home buyers looking for a bargain.
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How do portable mortgages work?
Getting a mortgage requires similar steps as getting a traditional mortgage. The buyer must meet credit, debt, and income requirements set by the VA or FHA and the lender or servicer holding the loan.
But there is one key difference: The loan can only be funded through the seller’s existing lender, with the lender’s approval, Zitlow said.
In other words, you can’t shop around when you take over someone else’s mortgage.
Additionally, the buyer must make up the difference between the sale price and the loan balance. Since buyers can’t increase the balance of a transferable loan, they’ll typically have to pay the remainder of the purchase price in cash. However, some buyers may be able to get a second loan, Birk noted.
For example, if you buy a home for $500,000 and the remaining balance on the seller-foreclosure loan is $400,000, you will have to pay $100,000 in cash unless you qualify for a second loan.
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Who is eligible for a portable mortgage?
The first question to ask is whether the seller has an FHA or VA loan. These two types of loans actually make up a significant portion of the market: About 13% of all mortgages are FHA loans, while about 11% are VA loans. These loans are insured by the federal government, meaning that if the borrower defaults, the lender will be repaid. Lenders who issue these loans may be a little more lenient in their requirements because of this guarantee.
The second question is whether the buyer can meet the specific requirements to take over the loan.
In the case of FHA loans, the property must be the seller’s primary residence and the buyer must meet qualifications set by the FHA and the lender, Zitlow noted.
For VA loans, a regional VA loan office must approve the transaction, but the borrower does not need to be a veteran, she added.
Additionally, the seller must sign the buyer’s agreement to take over the loan and give permission to the lender. Once the loan is approved and the sale is finalized, the lender replaces the original borrower with the new owner on the loan documents, Zitlow said.
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What are the advantages and disadvantages of portable mortgages?
The main advantage of a portable mortgage is that it offers a lower interest rate, which means lower monthly payments and lower interest over the life of the loan. Plus, settlement can be faster than a traditional loan closing (sometimes without an appraisal required), and closing costs are often lower, Zitlow said. The only major hurdle in many cases, as noted above, is that the person taking on the loan typically needs a lot of cash to pay for the property — often more than a typical down payment.
“However, some lenders…can help a potential buyer fill that gap by offering a second loan,” she said.
Depending on the buyer’s credit qualifications, a lender might allow the combined balance of the transferable loan and the second loan to reach 80 or 85 percent of the home’s value, which would require a 15 or 20 percent down payment, she added.
For sellers who are military veterans, a potential downside to portable loans is that they could lose their VA loan benefit, Birk said.
Typically, when a home is sold, the VA loan is paid off in full and the veteran can still get the VA discount on interest rates. But when a loan is assumed, it continues to be serviced by someone else who makes the payments — so whatever portion of the veteran’s benefit was used to buy that home remains tied up in the property until the loan is paid off, he noted.
“In some cases, veterans would qualify for a reduced VA loan for their next purchase, which would likely mean they would have to make a down payment,” he added. “In other cases, veterans would no longer have enough benefits to get another VA loan.”
To avoid this, a veteran could choose to sell only to other veterans, which would effectively replace the buyer’s VA loan benefit with the seller’s, Birk said. That way, the seller could regain full access to the VA loan benefit.
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