As interest rates continue to soar, more and more people are trying to figure out how to proceed with their homebuying plans. The California Association of Realtors (CAR) has announced its support for expanding the availability of assumable mortgages. This would allow buyers and sellers in America’s hottest real estate market to take advantage of fixed-rate loans backed by Freddie Mac and Fannie Mae. According to their statement, allowing buyers to assume a seller’s existing low-rate mortgage could help ease the financial burden for would-be homeowners and unlock more housing opportunities.

The announcement comes as buyers continue to struggle with affordability, with many unable to secure loans at favorable terms. Even if you’re not in California, the concept of assumable mortgages is something to monitor. For decades, California real estate has impacted the market from coast to coast, and this has the potential to be a game-changer.

Understanding Assumable Mortgages

In most real estate transactions, the person buying a home applies for a mortgage that gives them access to the necessary funds. An assumable mortgage alters that process by allowing the potential buyer to simply assume the mortgage that the person selling the home has. On the surface, this doesn’t seem like a huge difference, but changes in interest rates over the last few years have made it a viable option.

At the height of the COVID-19 pandemic, interest rates reached record lows as policymakers in Washington sought to stimulate the economy. However, the inevitable course correction that came only a couple of years later led to interest rates that soared to more than 8%. When compared to rates that were in the low 2% range in 2021, this jump has largely brought the real estate industry to a standstill. Even though rates have dropped to nearly 6%,

Under CAR’s proposal, buyers would be able to simply assume the mortgage of the sellers, giving them access to those lower rates from a few years ago. While this proposal has not yet been approved by state or federal agencies, the prospect has increased enthusiasm among potential buyers.

In the past, assumable mortgages have been limited to loans backed by agencies such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA). These loan types have always allowed for mortgage assumption for qualified buyers who get lender approval. Conversely, Freddie Mac and Fannie Mae loans have always had a “due-on-sale” clause that requires the original loan to be paid off if the property is sold. This proposal would change the rules, allowing those loans to be assumable.

An assumable mortgage still comes with some red tape. When a buyer assumes a mortgage, they often still need to qualify with the lender, demonstrate creditworthiness, and sometimes pay the difference between the home’s current value and the loan balance. For example, if the property is worth more than the outstanding balance, the buyer may need to provide cash or arrange secondary financing. While these extra steps can seem a bit frustrating, the fact remains that the savings in monthly payments and interest costs can make assumable mortgages a great option.

Why Are California Realtors Backing This Now?

CAR points to the increase in mortgage rates that has greatly slowed the market. By enabling assumable fixed-rate mortgages for a broader set of loan products, they believe homeownership could become more attainable for more people. From their perspective, this policy shift could open doors for buyers who are stuck on the sidelines under current market conditions.

It's also worth noting that California’s real estate market has long been marked by high prices and limited inventory. By allowing potential buyers to assume mortgages with lower rates, this proposal seeks to improve their buying power. This is also great news for sellers who can use their low rates from a few years ago as a marketing tool to make their listing more attractive.

CAR has been clear about the fact that this effort is meant to promote a more balanced housing market in the state. The idea is that if more transactions are feasible because of lower effective financing costs, then markets may become more fluid, benefiting both buyers and sellers.

Potential Benefits and Challenges

For buyers, the most obvious benefit is found in the opportunity to buy a home at the lower rates from a few years ago. In a high-rate environment, that difference can translate into hundreds of dollars per month in savings, and thousands over the life of a loan. This can help reduce monthly payment burdens, enhance affordability, and potentially open the door for households that would otherwise be priced out of the market.

For sellers, offering an assumable mortgage can make a property more attractive in a sluggish market. This allows sellers to move their homes faster while also receiving more offers.

Despite the potential, there are some potential challenges that this proposal could bring about. First, many conventional fixed-rate loans contain due-on-sale clauses, which prevent assumption unless the lender agrees to waive them. Without changes at the policy or regulatory level, assumable mortgages will still be limited.

From a lender’s perspective, assumable mortgages can significantly change the profile of their financial records. Investors in mortgage-backed securities priced new loans under certain assumptions of cash flow, yield, and risk; allowing assumptions on older, lower-rate loans could impact valuations or require new underwriting criteria.

Will This Affect You?

Ultimately, the proposal is nothing more than an idea that’s being pitched by California’s realtor association. However, if the proposal gains traction and receives approval from state and federal agencies, the impact has the potential to be significant.

For buyers and sellers in California, the proposal receiving approval could change things in a hurry. However, even if you’re not living in California, there are potential ramifications. The California real estate industry has always had a major impact on the rest of the country, and the possibility of assumable mortgages is no different. Should the proposal pass in California, it will likely receive nationwide attention and could serve as the shot in the arm that the US housing market needs to get back on its feet.