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Assumable Mortgages: What They Are and Why You Might Use One

In most cases, you get a brand-new mortgage when you buy a home.  Your new loan may be used by the home seller to pay off their old mortgage.

But sometimes, you can actually take on a seller’s old mortgage rather than get a new one. That depends on if that loan is categorized as “assumable.” An assumable mortgage is a loan that can be taken over, or assumed, by a qualified third party.

After assuming the seller’s mortgage, the buyer becomes responsible for repaying the existing loan. The outstanding balance, mortgage interest rate, repayment period and other terms often don’t change.

An assumable mortgage might make sense for a home seller who is finding it difficult to attract potential homebuyers, or for a buyer who is being priced out of the housing market due to higher interest rates.

In this article, we’ll describe the circumstances in which a mortgage can be assumable and how the process works.

We’ll cover:

Why assume a mortgage or allow yours to be assumed?

Assuming a mortgage might be attractive for homebuyers who are looking for an unconventional way to get a lower interest rate on a mortgage, especially in a higher interest rate environment. It’s also a way out for homeowners who could be having trouble selling their home.

Michael Becker, a branch manager with Sierra Pacific Mortgage in Lutherville, Md., had a client who couldn’t sell his home the traditional way, because it likely had more improvements completed than necessary for the area it was in. Becker reminded the client that he had an assumable FHA loan and that his rate, which was about 3.25%, might be attractive to prospective buyers interested in assuming a mortgage.

“Long story short, that’s what got his house sold,” Becker said, adding that the rate on the assumable mortgage was at least a percentage point lower than market rates at the time.

How mortgage assumption works

When you assume a seller’s mortgage, you take on the interest rate, payments and term of their original loan.

However, this doesn’t factor in the current homeowner’s equity. The assumable mortgage would only apply to the balance remaining on the owner’s existing mortgage, not the property’s current value. As a buyer, you would need to make up the difference between the mortgage and the value of the home, potentially by taking out a second mortgage.

You’d need to find a lender who’d be willing to lend you a second mortgage and also ensure you’re still adhering to combined loan-to-value ratio guidelines for the program under which you’re assuming a mortgage, Becker said.

There are two primary types of mortgage assumption: Simple and novation. Simple assumptions generally only apply in family transactions. Most standard sales follow novation.

Simple assumption

A simple assumption is a private transaction between the home seller and homebuyer that results in the buyer taking the title to the home and assuming responsibility for the seller’s mortgage payments. This arrangement likely doesn’t involve mortgage lender underwriting.

Although the buyer is expected to pick up the remaining mortgage payments, the seller is still liable for the outstanding mortgage debt in a simple assumption. If the buyer racks up late payments or goes into default, both the buyer’s and seller’s credit profiles are affected.

Novation

A novation assumption does involve a mortgage lender and the transaction involves the transfer of all rights and responsibilities of the existing loan to the homebuyer. The lender releases the seller from liability to the loan and begins to hold the new homebuyer liable for repayment.

For the lender to agree to a novation, the buyer usually must meet lending requirements.

Which mortgages can be assumed?

Most of the time, assumable mortgages are part of a government loan program. Under certain circumstances, loans guaranteed by the Federal Housing Administration, Department of Veterans Affairs and the U.S. Department of Agriculture can be assumed.

If you need to relocate for a job opportunity or are being deployed to a base across the country or overseas, having a buyer assume your mortgage could be a more efficient way to sell your home.

On the buyer’s side, if today’s mortgage rates are stripping away your buying power, it could be financially beneficial to assume an existing mortgage.

Here’s where each of the federal agencies stand on mortgage assumption.

FHA loans

All FHA loans are assumable, according to the Department of Housing and Urban Development, which oversees the program.

The HUD Reform Act of 1989 requires FHA lenders to review the creditworthiness of the prospective borrower who wishes to assume an existing FHA loan. The rule applies to loans originated on or after Dec. 15, 1989.

There are exceptions to the credit approval rule, including the original homeowner’s death (resulting in the home being gifted to an heir) or the original homeowner retaining an ownership interest in the property.

However, be aware that the rules for assuming FHA loans have changed over time. If you are looking to assume an older mortgage, there may be more restrictions. Significant changes were made to mortgages executed in the window between 1986 and 1989 that had previous restrictions that are no longer enforced due to legislative changes.

Check out our explainer for a deep dive on how FHA assumable mortgages work.

USDA loans

The U.S. Department of Agriculture’s Rural Housing Service permits mortgage assumption and has two different types: “new rates and terms” assumption and “same rates and terms” assumption.

  • New rates and terms assumption: The homebuyer assumes the seller’s outstanding loan balance, but the loan is re-amortized with a new interest rate and loan terms. Most USDA loan assumptions fall under this category.
  • Same rates and terms assumption: The homebuyer assumes the seller’s outstanding loan balance with the same interest rate and existing amortization — or repayment — schedule. The USDA allows this type of loan assumption in limited situations, such as when ownership is being transferred between family members due to death or divorce.

VA loans

The Department of Veterans Affairs (VA) permits loan assumption, and there are stipulations for certain loans that don’t exist for others.

VA loans originated after March 1, 1988, require prior approval before a lender will allow assumption. The buyer must meet credit and income qualifications.  Loans originated before March 1, 1988, are “freely assumable,” meaning that a homebuyer can assume the mortgage without prior approval from the VA or a VA-approved lender.

The VA allows unrestricted mortgage assumptions in the event of a death or divorce. Our article on assuming a VA loan provides a thorough understanding of the process.

What about conventional loans?

Conventional mortgages generally don’t permit assumption, since they often include a “due on sale” clause, said Sarah Bolling Mancini, of counsel for the National Consumer Law Center. This clause permits a mortgage lender to declare the outstanding loan balance due and payable if that loan is sold or transferred without the lender’s consent.

There are exceptions to the rule that are regulated by federal law, however, such as if your parent passes away and leaves their home to you in their will. In that situation, you would become the homeowner and take over paying the mortgage. Because of the circumstances that led to you assuming the mortgage, the lender wouldn’t be allowed to exercise the due on sale clause, Mancini explained.

“They have to allow a new person to take over making payments,” she said.

A lender can’t legally exercise the due on sale clause under a handful of circumstances, but those situations usually involve a transfer of ownership between relatives, rather than a third-party homebuyer looking to assume a mortgage.

“It is a difficult proposition for someone who has no relationship to the seller to try to take over their loan,” Mancini said. If a buyer does take over a seller’s loan and there is a due on sale clause attached to that loan, the lender has the right to foreclose on the home based on the transfer of ownership, she added.

Fannie Mae does allow assumption of its standard adjustable-rate mortgage and provides two choices for approved lenders to implement. Either the ARM is:

  • Assumable during the entire loan term, or
  • Due on sale during the fixed-rate period and assumable once the adjustable-rate period begins.

In cases where a lender chooses for a loan to be assumable for the duration of the loan term, the due on sale clause more than likely wouldn’t apply. However, if the lender only allows assumption after the ARM’s fixed-rate period ends and a transfer of ownership happens before the adjustable-rate period begins, the loan would immediately need to be paid in full.

If you have a conventional ARM, reach out to your lender to determine whether they allow assumption and how to qualify.

How to qualify for an assumable mortgage

Unless you’re taking over a mortgage from a family member, you generally must meet eligibility requirements for assumability — once the seller reviews their existing loan documents and contacts their lender to confirm the mortgage is assumable. Generally speaking, the buyer must meet the same credit and income requirements as they would if they were applying for a brand-new loan.

“You’re not going to let somebody assume a loan who doesn’t have any money in the bank, doesn’t have a job and has a terrible credit score,” Becker said.

Take a look at the table below for details on credit- and debt-related guidelines for an assumable mortgage though the FHA, USDA and VA loan programs.

Qualifying for an Assumable Mortgage
FHA loans USDA loans VA loans
Credit score 580* 640* 620*
Debt-to-income ratio 43% 41% 41%

*May qualify with a slightly lower score depending on compensating factors.

In addition to demonstrating your creditworthiness, you’ll need to show proof of steady employment and income. Check with your lender for complete details on how to qualify for an assumable mortgage.

For a rundown of the broader requirements for each loan program, see our guide on minimum mortgage requirements.

Pros and cons of mortgage assumption

Before you decide on mortgage assumption as a homebuyer or seller, be sure you’re clear on the benefits and drawbacks of this type of loan transaction.

For homebuyers

Pros

  • The chance to receive a mortgage that is significantly lower than the amount of a brand-new loan.
  • Depending on the loan program, your interest rate could be lower than today’s average rate.
  • Since you typically don’t go through the standard mortgage underwriting process, your closing costs are likely to be lower.

Cons

  • You might have to get a second mortgage to cover the home seller’s equity. If the home’s value is significantly higher than the outstanding loan balance, you’re responsible for making up the difference.
  • Even if you’re assuming the home seller’s outstanding balance, in the case of a USDA loan, you would more than likely be subject to a new repayment schedule.
  • Depending on the loan type, you may be charged a fee to assume a loan in addition to closing costs. For example, FHA lenders can charge up to $900 for a mortgage assumption.

For sellers

Pros

  • Your home can become more appealing to prospective buyers.
  • You don’t have to stress over paying off your existing mortgage when you’re ready to sell.
  • You get the chance to receive the equity you’ve built in your home as part of the assumption.

Cons

  • Depending on the type of assumption you’re granted, you could still be held liable for the mortgage debt if the assuming borrower defaults.
  • If you’re a VA loan borrower, your original entitlement (maximum loan guaranty provided by the VA) won’t be restored if the assuming borrower isn’t a veteran.

Alternatives for homeowners looking to sell

If you have a conventional fixed-rate mortgage or just don’t think mortgage assumption is right for you, there are other options for selling your home. Keep in mind you will have various costs in a home sale, including but not limited to inspection fees, closing costs, staging expenses and, possibly, repairs.

Take the traditional route

The standard way to sell a home is working with a real estate agent. Reach out to multiple agents and ask questions related to determining a sales price, the agent’s commission fee — which could cost around 5% or 6% of your home’s sales price — and all the other concerns you may have about selling your home.

Ask for agent recommendations from family, friends and colleagues. Additionally, a quick online search can help you find the best agent for your situation.

Or go the way of FSBO

If you’d rather not see that agent’s commission fee taken out of your profit, consider a “for sale by owner” transaction, known as FSBO for short. This means you’re selling your house independently of outside help.

There’s considerably more legwork involved in a FSBO, such as:

  • Learning your local market.
  • Setting a competitive sales price.
  • Marketing your home.
  • Hiring an attorney and title company.

For more help with selling your home without a mortgage assumption, read our explainer on how to sell your house.

Final thoughts

An assumable mortgage is one method of achieving homeownership with a somewhat easier entry point than qualifying for a mortgage through traditional means.

It will be more challenging to assume a conventional mortgage, but if you can meet or exceed the credit and income requirements for one of the government-backed mortgage programs, assumption might be a viable option for you.

Here’s how to get your budget ready to buy a home.

The information in this article is accurate as of the date of publishing.

 

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