A Guide to Assumable Mortgages in Today’s Market
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Richard Haddad Managing EditorClose
Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Skyrocketing mortgage interest rates can make homeownership seem like an elusive dream. With rates hitting their highest point in almost 23 years, the path to purchasing a home has become more challenging. For some home shoppers, there’s a potential solution: assumable mortgages.
Assuming a mortgage allows you to step into the shoes of the seller and take over their loan, often at a lower interest rate. It’s a unique approach that can make your dream of owning a home in today’s complex, high-priced housing market more attainable.
In this guide, we’ll walk you through the ins and outs of assumable mortgages, helping you make an informed decision that’s right for you.
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What is an assumable mortgage?
An assumable mortgage allows a buyer to purchase a home by taking over the seller’s existing mortgage loan. One reason more buyers are seeking assumable mortgages is to take advantage of lower interest rate financing. Many home sellers entering the market today refinanced during the pandemic era of historic low interest rates.
Thus, assuming a mortgage can be like inheriting a financial advantage. Rather than taking out a new loan at a high rate, the homebuyer can assume the interest rate, current principal balance, repayment period, and other terms of the seller’s existing mortgage.
However, not all mortgages are assumable, and there may be specific qualifications and fees associated with assuming a home loan. There are also new products and programs entering the market to help walk buyers and sellers through the assumption process.
Which mortgage loans are assumable?
To determine if a mortgage loan is assumable, you need to consider the type of loan and its specific terms. The most common loans that can be assumed are typically government-backed or government-insured loans. Here are some common types of mortgage loans and their assumability:
1. FHA loans
Federal Housing Administration (FHA) loans are often assumable. This means that a qualified buyer can take over the existing FHA loan, subject to lender approval. You will need to qualify for traditional FHA loan requirements, such as having a credit score of at least 580 and being able to make a minimum down payment of 3.5%.
2. VA loans
Similarly, loans guaranteed by the Department of Veterans Affairs (VA) are typically assumable. However, you’ll need to meet certain eligibility criteria, such as holding a credit score of 620 or higher, and the VA must approve the assumption. Surprisingly, you don’t necessarily need to be a veteran or active military service member to assume a VA loan. As with other lending options, your creditworthiness as a borrower will play the biggest role. You will also be required to pay the standard 0.5% VA funding fee.
3. USDA loans
United States Department of Agriculture (USDA) loans may also be assumable, but like VA loans, they come with specific conditions. In this case, you’ll likely need approval from both your lender and the USDA, and still hold a credit score of 620 or higher. An assumed USDA loan is typically assigned a new interest rate and terms. However, in some circumstances, like the transfer of property within families, the loan can be assumed with the original rate and terms without the borrower meeting all the eligibility requirements.
4. Some jumbo loans
Some jumbo mortgages that are originated by larger banks and not sold to Fannie Mae and Freddie Mac can be assumed. These circumstances are uncommon, however, and it can be difficult to know which jumbo mortgages are assumable.
5. Some adjustable-rate mortgages (ARMs)
ARMs are typically 30-year loans with a fixed rate for an initial period, such as five, seven, or ten years. According to Freddie Mac, some lender agreements “provide that the ARM is assumable for the life of the loan.” Other agreements “provide that the ARM is assumable only after the initial fixed-rate period has expired or until a specified event has occurred, and is thereafter not assumable.”
Because of their variable nature, assuming an ARM loan is not common and may not always be advantageous for the buyer. In cases where a conventional ARM loan has been deferred or modified to help the borrower avoid default, the loan is likely no longer eligible to be assumed by a third party.
Are conventional loans assumable?
The majority of conventional mortgages offered by private lenders — loans backed by Fannie Mae and Freddie Mac — are not automatically considered assumable. Some conventional loans can be assumable in cases involving special circumstances, such as after a death or divorce. To qualify, the homeowner’s mortgage contract would need an “assumption clause” noted in the mortgage contract.
An assumption clause allows the mortgage holder to transfer the loan to another party. But even with this provision, the mortgage lender typically needs to approve the transfer. The new borrower would still need to meet the loan’s eligibility requirements.
How does an assumable mortgage work?
When you assume a mortgage, the existing borrower transfers the loan balance to you, making you responsible for the remaining payments. In most cases, this means you inherit the same terms as the previous homeowner, including the interest rate and monthly payments.
Unlike traditional mortgages, assumable mortgages don’t typically require a new appraisal, potentially saving you money. However, it’s essential to conduct a home inspection to identify any repair issues. Once the transaction closes, you assume full responsibility for the mortgage payments, relieving the seller of their obligations — at least in most cases. (See “Seller pro and con” section below.)
As with any home purchase, be financially prepared
Whether you’re buying a home with a traditional mortgage or a mortgage assumption, you will need to compensate the seller for the equity they’ve built up in the home. This is typically a combination of appreciation and what the current owner has paid off on their loan. These funds — which are part of the purchase price — might come from your own savings or be financed through a separate loan.
For example, if you buy a $500,000 house from a seller who has an outstanding mortgage balance of $300,000, they have $200,000 worth of equity that belongs to them. You will need to pay the seller that $200,000 at closing.
Pros and cons of assumable mortgages
Benefits of assumable mortgages
- Lower interest rate: You may secure a mortgage with a lower interest rate than current market rates, potentially saving money over the life of the loan.
- Can be reduced out-of-pocket costs: If the home you are purchasing has low equity, this can mean less real cash you need to bring to the closing table.
- No need to shop around for mortgages: You won’t need to shop and compare lenders. Even if you need to finance the seller’s equity stake, it can be easier to qualify for that smaller, separate loan amount.
- You can opt out of paying for an appraisal: While you still might want to get an independent appraisal, this step is not typically required when assuming a mortgage.
Drawbacks of assumable mortgages
- You may need substantial cash: If the seller has a lot of equity built up in the home, or if the value of the property far exceeds the seller’s mortgage balance, you may need a large sum of money to pay off their equity stake. Most lenders are unable to provide a second mortgage in these circumstances.
- Limited availability: FHA, VA, and USDA loans — which comprise less than 20% of active listings on the market — are eligible for an assumable mortgage.
- Jumping through lender approval hoops: Loan approval can be tricky as lenders enforce strict qualification standards and often take longer to process the assumption and escrow. Some recently launched services help homeowners navigate this process with greater speed and certainty. For some government-insured loans, you may also need the approval of the government agency that backs the loan.
Seller pro and con
Pro: For sellers, offering an assumable mortgage can help a home sell faster by giving buyers a simplified process and a lower interest rate.
Con: Unless a buyer uses a service to help facilitate the assumption, the process could delay the close of escrow.
If my loan is assumed, am I clear of the debt responsibility?
In the vast majority of cases, yes. When handled correctly and thoroughly, or with the help of a professional service, assuming a loan relieves the original borrower of the debt responsibility. The proper process will include getting lender approval and submitting all required forms to release the seller from liability. In cases involving VA loans, getting the proper release forms completed is especially important to retain veteran loan entitlement benefits.
Is it hard to qualify for an assumable mortgage?
Qualifying for an assumable mortgage follows similar requirements as a traditional mortgage. Lenders assess your credit score, debt-to-income ratio (DTI), and financial stability to ensure you’re a responsible borrower. You’ll need to provide documentation like proof of income, identification, and potentially employment history.
Meeting these criteria is crucial for the lender’s approval, although the specific requirements can vary. Consulting with a mortgage expert can help you navigate the process and find the right lender to assist you in your home purchase.
How much does it cost to assume a mortgage?
The cost of assuming a mortgage involves several factors. These may include real estate agent commissions, a down payment, closing costs, and inspection fees akin to those associated with a new mortgage.
Additionally, you’ll typically encounter an assumption fee specific to this transaction type. The precise costs can vary depending on lender policies, the mortgage investor, and state laws. Fees are either calculated as a percentage of the unpaid principal balance or as a fixed amount.
If you’re assuming a VA loan, there might be a VA funding fee, usually 0.5% of the remaining mortgage balance. However, some exemptions apply, such as for those receiving VA disability payments, active-duty Purple Heart recipients, and surviving spouses with Dependency and Indemnity Compensation (DIC) benefits. Consult with your lender to get a clear picture of the expenses involved in assuming a mortgage.
What’s the process to assume a home mortgage?
Here’s a simplified overview of the steps when assuming a mortgage:
1. Find an assumable mortgage: Identify a property with an assumable mortgage.
2. Qualify as a buyer: Meet the lender’s eligibility criteria, including creditworthiness and financial stability.
3. Negotiate terms: Negotiate terms with the seller, including price, loan balance, and interest rate.
4. Lender approval: Obtain approval from the existing lender, demonstrating your ability to take over the loan.
5. Assumption agreement: Sign an assumption agreement, officially transferring the mortgage responsibility to you.
6. Closing: Finalize the transaction at a closing, paying any fees and closing costs.
7. Continue payments: Start making mortgage payments following the existing terms, including the interest rate and repayment period.
Can I assume a mortgage after someone’s death?
Assuming a mortgage can occur after a family member’s passing when inheriting their home. Even without an assumption clause or if it’s a conventional loan, you can often assume the mortgage. Inheritance-related assumptions typically do not require the new borrower to meet all qualification criteria if they were related to the deceased.
Can I assume a mortgage after a divorce?
Following a divorce, the spouse awarded sole ownership of a property can often assume the existing mortgage themselves. The lender will review their financial status, including income statements, asset lists, and creditworthiness, to ensure they can meet minimum monthly payment requirements. It’s advisable to consult a home loan expert to navigate the assumption process effectively in both scenarios.
Is assuming a mortgage a good option for me?
Assuming a mortgage can be an attractive choice if you find a home with a competitive interest rate, potentially saving you time and money. However, it comes with some limitations and cautions.
HomeLight can connect you with a top real estate agent familiar with assumable mortgage listings in your market. We also recommend you consult with a real estate attorney when considering an assumable mortgage.
With the right agent, the right home, and the right lending options, an assumable mortgage can put you on the doorstep of homeownership.
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