Learning about assumable mortgages
Let’s learn about how mortgage assumption works and see if it could be in the cards for you.
What is an assumable mortgage?
An assumable mortgage allows a home buyer to take over a seller’s existing mortgage with the same exact terms. This means the buyer steps into the seller's shoes, taking on the remaining balance, interest rate and repayment schedule with the same lender.
An assumable mortgage allows a home buyer to take over a seller’s existing mortgage with the same exact terms.
In exchange for handing off the mortgage, the buyer has to compensate the seller for the equity they’ve built up in the home. For example, if the home costs $500,000 and the seller’s remaining loan balance is $200,000, the buyer needs $300,000 upfront at closing.
Assuming a mortgage is a handy option because it can allow the buyer to avoid the higher interest rates of today's market. The catch? Not all mortgages are assumable, and you’ll still have to meet the lender’s criteria to get one.
Types of assumable mortgages
For the most part, only government-backed loans are assumable, like Federal Housing Authority (FHA) loans, Veterans Affairs (VA) loans or U.S. Department of Agriculture (USDA) loans. The more common conventional loans—the ones backed by private lenders—have “due-on-sale” clauses that require the remaining balance to be paid in full when the property changes hands, essentially closing out the loan and the rate that came with it.
Requirements for assumption
Not just anyone can assume a mortgage. Potential buyers will have to qualify with the seller’s lender and meet the credit and income criteria for that particular loan. The buyer also needs to get permission from the government agency sponsoring the mortgage, whether it’s the FHA, VA or USDA. Here’s some info to help you see if you’d qualify for these types of loans:
- FHA loan requirements: FHA loans were designed to help people with lower credit scores and modest down payments get into homes. To assume an FHA loan mortgage, you’ll have to meet the standard criteria for an FHA loan. That requires a credit score of 580 and a down payment of 3.5%. You might be able to get away with a credit score of 500 if you can afford a down payment of 10% or more. To qualify, the seller must use the home as a primary residence and the buyer must confirm that the FHA loan is assumable.
- VA loan requirements: VA loans are for service members, veterans or eligible surviving spouses. But guess what? You can assume a VA loan without having served in the military. You’ll need to check some other boxes, like having a 620 credit score and getting approval from the lender and regional VA loan office. You’ll also owe a VA funding fee, which is typically 0.5% of the remaining mortgage balance. Keep in mind, however, that sellers with a VA loan might opt for an eligible military buyer so they can hold onto their VA loan entitlement for their next home. If they sell to someone without VA qualifications, they lose their ability to secure another VA loan until the assumed mortgage is paid off.
- USDA loan requirements: USDA loans are assumable if you have a qualifying credit score, meet income requirements and get approval from both the lender and the USDA. However, even if you’re approved to assume the mortgage, you can’t proceed if the seller is behind on payments. It’s also worth noting that a USDA assumed mortgage comes with a new rate and terms, unless you’re doing a special title transfer between family members. In that case, you may be able to keep the same loan.
Pros and cons of assumable mortgages
Before you put all your eggs in the assumable mortgage basket, you should consider the potential pros and cons when it comes to the costs, mortgage assumption process and your loan options.
| Advantages | Disadvantages |
|---|---|
| Lower interest rates | Large down payment may require a second loan |
| Lower closing costs | Only available with FHA, VA and USDA loans |
| No appraisal necessary | Buyer still needs to qualify |
Costs and fees
A mortgage assumption will probably cost less than starting one from scratch. You can save a little by skipping the appraisal, and you’ll benefit from the closing cost caps that come with government-backed loans. But besides that, assuming a mortgage shares a lot of the same costs as taking out a brand new one—and then some.
Assumption fees
You’ll need to pay to play in the mortgage assumption world. The lender will charge you for processing the assumption, which could cost you 0.5% to 1% of the outstanding mortgage balance.
Additional costs
Besides the assumption fee, here are some other financial nuances that are unique to an assumable mortgage:
Substantial down payment: If the seller's home equity is high, the gap between the home’s price and the loan balance will be bigger—and you’ll need the cash to cover the difference.
Possible second mortgage: If you can’t cover the down payment with your own money, you may need to secure a second mortgage, which comes with its own set of costs and interest rates.
Lender's approval costs: A mortgage assumption might trigger unique charges associated with meeting the lender’s requirements—costs that don’t apply when getting a new mortgage.
How much does mortgage insurance cost?
Assuming a mortgage might get you a great interest rate, but you’ll also take on the mortgage insurance or funding fees that come with the loan:
FHA loans: FHA loans come with two types of mortgage insurance premiums (MIPs). You’ll pay an upfront MIP of about 1.75% of your loan amount and an annual MIP ranging from 0.15% to 0.75%.
USDA loans: If you’re assuming a USDA loan, you won’t pay for mortgage insurance, but you’ll owe a “guarantee fee” that protects the lender. This is 1% of the loan amount, plus an annual fee of 0.35%.
VA loans: Taking over a VA loan? While you won’t have to pay for mortgage insurance, you’ll still owe a VA funding fee. This fee usually rings up to 0.5% of your remaining balance.
Exceptions to the rule: death or divorce
In “normal” circumstances, a loan is either assumable or non-assumable. But big life events shake up the rules, even for conventional loans. If a death occurs, a family member can assume the existing mortgage for a home they’ve inherited. This new borrower won’t have to jump through hoops either; the lender’s standard requirements don’t need to be met.
Divorce works a bit differently. If a spouse chooses to remain in the home, they can take on full ownership of the mortgage through the divorce proceedings. But before they can assume the loan, they’ll have to prove that they can afford the mortgage payments on their own.
Steps to assume a mortgage
Think you’re ready for assuming a mortgage? Make sure all your ducks are in a row with this step-by-step guide.
1. Confirm the loan is assumable
First things first: let’s make sure the loan you’re after is assumable. You’ll want to talk to the current lender to check if the loan is in good standing and that they’ll let the assumption move forward. You should then make sure you meet all the requirements for that loan type, from your credit score to your income and debt-to-income ratio.
Zeroing in on your dream home
To find a home with an assumable mortgage, search online listings for “assumable” tags or ask a title company for listings in the area with government-backed loans.
2. Prepare for costs
The costs of an assumable mortgage vary, so make sure you can foot the bill. For instance, your down payment will depend on how much home equity the seller has built up. Remember, you’ll owe the difference between the purchase price and the remaining loan balance, which can add up to be much more than the traditional 20% down.
3. Submit your application
If you’ve ever applied for a mortgage, this is the familiar song and dance to prove yourself to a lender. You’ll gather your paperwork from proof of income to asset verification and fill out the lender’s application.
4. Close and sign liability release
If your mortgage assumption gets the greenlight (hooray!), you’ll need to complete some paperwork to close the deal. This usually involves signing the liability release, which officially cuts the seller loose from responsibility for the mortgage, so it’s all on you.
