What Is an Assumable Mortgage?

How to Assume a Mortgage When Buying a House

There are plenty of mortgage loan choices when you're ready to buy a home, but a less common option you may have never even heard of is an assumable mortgage.

Not all mortgages are assumable, and you'll want to understand the benefits and risks of assuming a mortgage to decide if it's the right choice for you.

What Is an Assumable Mortgage?

Assumable mortgages allow you to buy a house by taking over, or "assuming," the seller's mortgage loan rather than getting a new mortgage to purchase the property.

If the seller's lender approves your application to assume the mortgage, you keep the seller's interest rate, principal balance, repayment years, and other loan terms, and become responsible for repayment.

How Does an Assumable Mortgage Work?

Assumable mortgages have similar loan requirements to other types of mortgages. You'll need to complete an application, provide credit and financial documents, and get approved by the seller's lender to assume a mortgage.

You'll likely need to sign a release of liability that makes it clear the seller is no longer responsible for paying off the mortgage. The lender may not require a new home appraisal when you assume a mortgage, which can save you time and the appraisal fee.

How Much Do Assumable Mortgages Cost?

Assuming a mortgage usually costs less than taking out a new home loan, but there are still considerable expenses to plan for. Lenders may charge an assumption fee, which varies depending on loan type. There are also standard closing costs like title, escrow, and recording fees.

You won't have a standard down payment, but you'll need to cover the seller's home equity, which is the difference between their remaining loan balance and the purchase price. This could be a small or significant upfront payment, depending on how much equity they've built.

Why Do Homebuyers Assume Mortgages?

You might be interested in assuming a mortgage when the rate on the existing loan is significantly lower than current rates. For example, if the seller has a 3.5% interest rate on their mortgage and current rates are 6.5%, it makes sense to assume the mortgage.

Another time you may consider assuming a mortgage is when the seller doesn't have much home equity, which can mean lower upfront costs.

Types of Assumable Loans

Government-backed mortgages like FHA loans, VA loans, and USDA loans are often assumable. Here are some important requirements to know:

• FHA loans: If you want to assume an FHA mortgage, you'll need to meet FHA credit and financial requirements to get approved.
• VA loans: You'll need to meet VA credit and income requirements to assume a VA loan and pay a VA funding fee. You don't have to be a veteran, someone currently serving in the military, or a surviving spouse of someone who's served to assume a VA loan.
• USDA loans: USDA loans typically have income requirements you'll need to meet as well as credit and other financial standards.

Buying a house with an assumable mortgage might make your home more attractive to a buyer when you decide to sell it.

Are Conventional Mortgages Assumable?

Conventional loans are the most common type of mortgage in the United States, but they're not assumable, except in rare instances (such as the original mortgage agreement specifically allows it). Most conventional loans include a due‑on‑sale clause, which prevents assumption unless the lender can approve it on a case‑by‑case basis.

It may also be possible to assume a conventional mortgage if you inherit a home after someone passes away, or if you're awarded a home during a divorce.

Benefits and Risks of Assuming a Mortgage

Before deciding to assume an existing mortgage, you should consider the pros and cons.

Benefits of Assumable Mortgages

Potential benefits of mortgage assumption include:

• Savings: Lower interest rates on existing loans mean you could benefit from smaller mortgage payments. Loan assumptions typically involve fewer fees than typical mortgages, which can lower closing costs. Plus, if the seller has little or low equity, the down payment required to cover it may be smaller.
• Streamlined process: Because you're taking over an existing loan, the underwriting process can sometimes move faster than with a new mortgage.
• Easier qualification: FHA, VA, and USDA loans often have more flexible credit and income requirements than conventional loans.

Risks of Assumable Mortgages

Some potential risks to keep in mind include:

• Higher upfront costs and fees: When the buyer assumes a mortgage, they must pay the seller's equity out of pocket or secure an additional financing option. If the seller has a lot of equity in their home, it could mean significant upfront assumption fees.
• Lender approval requirement: Approval isn't guaranteed—you have to qualify with the lender. Assuming a mortgage without approval carries additional risks for the seller. If the lender doesn't release the seller from the loan, they could remain legally responsible if payments aren't made.
• Loan restrictions: Not all loans are assumable. Conventional loans usually aren't, and government-backed mortgages still require buyers to meet certain financial minimum requirements to be approved.

How To Assume a Mortgage

If you're interested in a loan assumption, here are a few steps to help you start the loan assumption process.

1. Determine if the Loan Is Assumable and Contact the Lender

Both the buyer and seller should notify the lender of their intention to proceed with a loan assumption to ensure they meet the lender's specific requirements.

2. Apply and Qualify

The buyer will submit an application to the lender, where their credit score, income, and debt-to-income ratio (DTI) will be reviewed. This part of the process is similar to applying for a new mortgage.

3. Pay Seller's Equity

The buyer must pay the seller for any equity they've earned on their home, as well as the balance on the existing mortgage. For example, if you're assuming a mortgage on a $350,000 valued home and the mortgage balance is $250,000, you will negotiate with the seller on how much equity you're willing to pay to assume the current mortgage.

4. Complete Paperwork and Close on the Loan

The lender will draft an assumption agreement, and both parties will close the transaction. At this time, the buyer will also pay any necessary fees, which are typically lower than those for a new mortgage closing.

How To Find an Assumable Mortgage

There are a few ways you can go about finding available mortgages.

• Real estate agents and online listings: Some listings on real estate websites mention assumable mortgages. You can also ask a real estate agent directly.
• Lenders: Reach out to mortgage lending companies that offer the types of loans that can be assumed to see if they have any assumable listings.

FAQs on Mortgage Assumption

Want to know more about assumable mortgages? We've got you covered with answers to these frequently asked questions.

Can Family Members Assume Mortgages?

Yes. When a family member dies, it may be possible to assume their mortgage, but if you're not already on the title, other steps will likely have to be taken to gain ownership.

When couples divorce and one person is awarded ownership of a house, it may be possible for that person to assume the mortgage.

Do You Need a Down Payment for an Assumable Mortgage?

Yes, but it won't be the same as a traditional down payment. You'll need to cover the seller's equity, and this amount—which depends on how much the seller has paid off vs. the home's current value—can vary widely.

Is It Hard To Find an Assumable Mortgage?

It can be challenging to find an assumable mortgage because assumable loans aren't always advertised in real estate listings. Most mortgages that can be assumed are FHA, VA, or USDA loans, so focusing your search on those types can make finding one easier.

Is My Mortgage Assumable?

You can determine if your mortgage is assumable by checking your loan type and terms or reaching out to your lender.

Final Thoughts on Assumable Mortgages

Assumable mortgages may not be common, but they might save on interest and closing costs in certain situations. By understanding how they work and weighing the benefits against the risks, you can decide if assuming a mortgage makes sense for you.

If you're ready to kick off your homebuying journey, get started with Freedom Mortgage today.