What is an assumable mortgage?

A younger man shakes hands with his grandfather after taking on an assumable mortgage from him.Image: A younger man shakes hands with his grandfather after taking on an assumable mortgage from him.

In a Nutshell

An assumable mortgage is a loan that someone else can take over from the original borrower. The person who assumes the mortgage makes the payments from that point onward, typically at the same rate and terms.
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If you’re shopping for a home while interest rates are high, you might consider buying a property with an assumable mortgage.

An assumable mortgage is a mortgage that a seller can hand over to a buyer. Instead of applying for a new loan to finance their home purchase, the buyer can take responsibility for paying the seller’s mortgage if the seller and lender allow.

In this article, we’ll look at how an assumable mortgage works and discuss the different types of assumable mortgages. We’ll also go over some pros and cons.

What is an assumable mortgage?

An assumable mortgage is a home loan that can be transferred from one borrower to another. The new borrower then makes the rest of the monthly payments on the mortgage, usually at the same interest rate and terms.

What kinds of mortgages are assumable?

Conventional loans usually aren’t assumable. But the following types of government-backed loans can be assumed under certain conditions.

FHA loans

FHA loans can be assumed. For loans that originated on Dec. 15, 1989, or later, lenders must assess the credit of the person who would be assuming the mortgage. If that person qualifies and formally assumes the loan, the lender must give the original borrower a release from liability.

VA loans

A VA loan can be assumed by a veteran or a non-veteran. If a veteran assumes a VA loan, they can use their VA entitlement benefit to buy the home, and the original borrower might be able to get the entitlement they used restored.

If a VA loan was approved on or after March 1, 1988, then a person who wants to assume the loan must apply to the lender and the VA for permission. The original borrower has to ask for a release from liability so that they’re not held responsible for repaying the loan going forward.

It’s possible to assume a VA loan that was approved before March 1, 1988, without the agreement of the lender and the VA. But it’s a good idea for the original borrower to contact the VA to get a liability release.

USDA loans

USDA loans are assumable, but the person assuming the loan typically gets a new interest rate and new terms that they qualify for themselves. To be eligible for the terms of the guaranteed loan program, your income can’t be higher than 115% of the median for the area, and you must be unable to qualify for a conventional loan without private mortgage insurance.

You’ll also need a front-end debt-to-income ratio of no more than 29% and a back-end debt-to-income ratio of no more than 41%. Your front-end ratio reveals how much of your pretax income would go toward a mortgage payment, while your back-end ratio shows how all of your debts — including your existing debts with a mortgage payment added in — compare to your pretax income.

In some specific cases, such as transferring property to a close relative or loan assumptions following death or divorce, the person assuming the loan doesn’t have to qualify based on income or credit history and can keep the original rates and terms.

How does an assumable loan work?

Before you can assume a loan, you generally have to apply to the lender that issued the loan and get that lender’s approval.

If the lender gives you the green light, you can close on the house. The seller gives you the title to the property and hands off the mortgage to you. In exchange, you pay the seller the purchase price of the house minus the remaining balance on the mortgage.

For example, if you’re buying a home for $400,000 and the mortgage balance is $320,000, you need to pay the seller $80,000. You can do this by making a large down payment in cash or by taking out a second mortgage.

Typically, the lender gives the seller a liability release, which is a document stating that the seller is no longer responsible for paying the loan.

Pros and cons of assumable mortgages

It makes the most sense to assume a loan when interest rates are currently high. If a seller has a lower mortgage rate than the prevailing rates, you might be better off taking over that loan than if you applied for a new mortgage.

At the same time, assuming a mortgage that the seller has been paying off for many years could cost a lot of money upfront. If the seller has gained a lot of equity in the home, the sale price could be well above the remaining balance on the mortgage. In that case, you’d have to make a very large down payment or make up the difference by taking out an additional loan at current rates.

Here are some of the potential benefits and disadvantages of assuming a mortgage:

Buyers looking for lower interest rates than are currently available may prefer an assumable mortgage.If the buyer doesn’t make payments, the seller could potentially be responsible for the payments.
Lower interest rates may save buyers thousands of dollars over the life of their loan.Sellers who let buyers assume their VA loans could lose a portion or all of their loan entitlement benefit if the new owner defaults.
A home appraisal isn’t usually required when assuming a mortgage, which might make the deal easier to close and can save the buyer money.Buyers are typically limited to the terms of the outstanding mortgage.

Assuming a mortgage after death or divorce

If you become the new owner of a home because you inherited it or because of a divorce, it may be possible to take over the mortgage payments even if it’s not assumable. You might not even have to fill out a loan application. While lenders are generally required by law to look at a borrower’s finances and determine if they will likely be able to repay a loan, that typically doesn’t apply when the borrower has already gained the title to the property.

Costs to assume a mortgage

Closing costs to originate a mortgage are usually 2% to 5% of the loan amount, according to Freddie Mac. When you assume a mortgage, closing costs are often lower than average.

You do have to make a down payment, though, which could be quite large if the seller has a lot of equity in the home. Alternatively, you could take out a second mortgage, but that comes with its own costs that you’ll need to take into account.

What’s next?

Ask yourself these questions as you consider whether assuming a mortgage is right for you.

  • How much would you save on interest? If you assume a mortgage that was approved when rates were much lower, you might see significant savings.
  • Are you OK with accepting the mortgage terms as they are?
  • How much of the home’s price does the mortgage cover? If the seller has only a small remaining balance on their mortgage, you might not actually save much by assuming it.
  • If you plan to take out a second mortgage, how does the cost compare to getting a new home loan to cover the entire purchase? Look at how much you’ll pay for each option to see which is more affordable.

About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such as Hcareers, Impactivate and K… Read more.