“It always seems impossible until it is done.” — Nelson Mandela
It’s hard to buy a single family house right now.
Whether you’re going to live in the house or plan on turning it into a rental, rates are high.
At the time of this blog, interest rates are around 8% as opposed to the crazy 2% to 3% lows we saw a few years ago.
What if I told you there was a way you could buy someone’s house and keep their low rate?
Would that interest you?
There are two main ways I want to talk about today.
Specifically, how people are getting single family houses and the opportunities they’re finding.
Let’s get into it!
1. What is a Loan Assumption?
You’ve probably heard the old saying about the word assume.
But what does it mean to assume a loan?
It can actually keep a rate low.
If someone is selling a house with a 3% rate, you would normally put an 8% loan on it
What if there’s a way you can take their loan and get it in your name?
There are two ways to do assumptions right now.
The first is an FHA or a VA loan.
An FHA loan is like a first-time home buyer loan.
You can typically only have one at a time.
These kinds of loans make up 11% of all loans in 2022.
A VA loan, which is a veteran’s loan, makes up 8% of all loans.
One in five homes purchased nationally are done so through these two loan types.
You don’t have to be in the military to assume a VA loan.
If the seller does have this type of loan, however, it may limit their ability to get another loan.
There are also some stipulations if you assume a loan.
These vary depending on the loan type.
For example, if you assume an FHA loan, the seller can still apply for other loans, unlike the more limited options of a VA loan.
You can also use consultants to help you with the process.
When you contact them, you can tell them what type of property you’re looking for.
Then, they can search in the MLS (multiple listing service) and figure out what type of loan the property has.
That will give you an opportunity to come in and assume the buyer’s debt.
If they have 27 years left on their loan at 3%, you can pay a fee and obtain that exact same loan.
It’s a pretty awesome deal!
That’s how you can physically assume the loan.
The challenge could be if they have a lot of equity in the deal that you would need to bring cash at closing to cover this shortfall.
The second way to obtain a lower interest rate is something called “subject to” financing.
2. “Subject To” Financing
Pace Morby talks about what it means to get a “subject to” loan in his book: Wealth Without Cash.
It uses the same scenario we covered before:
Someone has a 3% loan when they sell a house.
If they sell the house to me, but keep the loan in their name, what happens?
What would be the benefit to you?
The benefit for you would be to keep the loan at a lower rate.
The benefit to the seller is the loan remains in their name.
Typically, this kind of financing involves a special escrow company.
They manage all the nitty gritty and make sure everything goes through.
The contract in these deals usually has stipulations.
Why would someone choose this strategy?
There is definitely a risk that the new buyer won’t pay the loan and the seller will get the property back.
One reason a seller would want to use “subject to” financing is when certain issues come up.
Let’s say valuations were higher when they first bought the property.
Now, they got a lower rate, but the value of their home has actually dropped.
If they sold, it might be at a loss in order to pay the real estate agent.
A “subject to” financing strategy would allow them to either break even or have a higher asking price for the house.
In this type of situation, a new buyer could come in and overpay.
The seller would be able to close, not lose any money, and hold onto their debt.
It’s a unique situation, but there are a lot of folks who are doing this.
3. Conclusion
Loan assumptions are easier to manage.
You will also likely need a consultant for that route.
“Subject to” financing is almost like the wholesale route.
It will be a lot more legwork, but there are ways you can do it either with no money down or very little money.
One thing you should know about assuming loans before we finish up here:
If there’s a lot of equity in the house, you may have to bring a bunch of cash to closing.
For example, if the loan is $700,000, in order to assume that loan, the seller may want to have the difference.
That would mean bringing $300,000 at closing.
Like with any real estate strategy, there are caveats.
But these options will give you the opportunity to have lower interest rates, which is incredibly valuable.
The asset is not just the house; it’s the debt.
The debt controls the cost of money for the extent of the loan.
There are lots of opportunities available to you.
Now you can get creative!
You can find listings of who has an FHA loan or a VA loan.
For sellers who have no money in the house, there is value in keeping that loan and going into a “subject to” or creative financing.
Now I want to hear from you!
Are you looking to buy in the single family market?
Which of these strategies appeals to you?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
