It’s no secret that uber-high mortgage rates have caused many homebuyers and sellers to reevaluate their place in the housing market. Would-be sellers are locked into their homes with sweetheart rates, while prospective buyers just don’t have the inventory — or the funds — to find a house that fits their needs.

Terry Day

But Terry Day, a Realtor at DeLex Realty in Scottsdale, wants to call attention to one mortgage rate “cheat code” that he says many agents don’t know about: assumable mortgages.

Day realized last year that he needed to figure out a way to help his clients navigate a market full of high interest rates and unaffordable homes. Enter the assumable mortgage, a type of mortgage where the buyer takes over the seller’s mortgage payments — and their rate.

The main types of assumable mortgages are VA or FHA loans or USDA (farmland) loans. In Arizona, the bulk are VA and FHA.

Here’s the premise: A buyer applies to take over the remaining balance of a seller’s mortgage by paying them outright for the equity they already own in their home. For example, if a seller has paid off $100,000 of a $500,000 FHA or VA loan, they own $100,000 worth of that home. A buyer can purchase that $100,000 equity from the seller — either in cash or through a second loan — and keep the seller’s low mortgage rate as they continue paying off the home.

For homes that have appreciated, buyers will have to pay the difference to the sellers, again either in cash or through additional financing. Take the above scenario, for example: let’s say the seller’s home is appraised for $600,000. The buyer trying to assume their mortgage would need to pay an additional $100,000 to the seller to make up for the home’s increase in value. That’s a hefty chunk of change, but one that represents huge financial savings in the long run.

Not every buyer will qualify. For example, buyers who wouldn’t qualify for a standard mortgage won’t qualify for an assumable mortgage. Buyers must also meet financial requirements for the loans they’re going to assume — for example, VA loan borrowers must be able to make a minimum down payment of 3.5% and have a credit score of at least 580. Therefore, anyone who assumes a VA loan must check those boxes as well.

Additional financial barriers also pose a roadblock, as with most home transactions. Day posits that his assumable mortgage clients should have about 10% of the home price available in cash, plus an additional $5,000 to cover closing costs.

These loans may take up to 90 days to be approved, but if they are, buyers can secure mortgage rates well below current averages.

“It’s a niche,” Day said. “We just came out of a booming market where you didn’t need a niche. Now you do.”

According to Day, the main reason buyers don’t take advantage of this mortgage type is because their Realtors simply aren’t educated on the process. However, another issue is identifying homes with the type of financing that qualifies.

When Day first started working with assumable mortgages, the inability to find accurate information on existing financing presented a large barrier.

“When a Realtor lists a home, they have the option to choose the existing financing,” Day explained. “In the Phoenix MLS, they don’t require you to check if the home is an assumable mortgage or not.

“When listing homes, agents need to enter their data correctly,” he continued. “It can open their sellers up to more prospects. But Realtors also need to be more lending-aware so they can give their clients some guidance.”

One common misconception about assumable mortgages is that the buyer must be a veteran in order to assume a VA loan — but that’s not true. Any buyer can take over a veteran’s loan, even if they aren’t a veteran themself and wouldn’t have been able to obtain that mortgage in the first place. It’s a loophole of sorts.

Seeking to clarify these misconceptions, Day teaches assumable mortgage classes both in-person and online, teaching agents about the mortgage assumption process, from finding qualifying homes to applying and what to expect from lenders.

“More people need to know about this,” Day said. “It’s like a home mortgage cheat code.”

To schedule an assumable mortgage literacy class with Terry Day or learn about future in-person sessions, you can visit his website.