What is an Assumable Mortgage?

Author  Joe Chappius

Editor  Abraham Jimoh

Last updated: June 20, 2024

What is an Assumable Mortgage?

An assumable mortgage is a home loan that allows a buyer to take over the seller’s existing mortgage, along with its current terms, interest rate, and remaining balance. Instead of applying for a new mortgage, the buyer assumes responsibility for the seller’s mortgage payments.

Why are assumable mortgages gaining popularity?

• Rising interest rates have made new mortgages more expensive, making existing loans with lower rates highly desirable.
• Assumable mortgages can help buyers save money on interest payments and potentially lower their monthly payments.
• For sellers, assumable mortgages can be a selling point, attracting buyers who may be struggling to qualify for a new loan at current rates.

How does it work?

When a buyer assumes a mortgage, they are essentially stepping into the seller’s shoes and taking over the obligation to repay the loan. The buyer must meet the lender’s qualifications, which typically include a credit check and proof of income, to ensure they can afford the monthly mortgage payments.

Not all mortgages are assumable. In fact, most conventional mortgages are not assumable due to the “due on sale” clause, which requires the loan to be paid in full when the property is sold. However, there are certain types of mortgages that are assumable, such as FHA loans, VA loans, and USDA loans.

What Types of Mortgages Are Assumable?

While most conventional mortgages aren’t assumable, there are three main types of government-backed mortgages that typically allow for assumption:

FHA Loans: Backed by the Federal Housing Administration, FHA loans are known for their low down payment requirements (as low as 3.5%) and flexible credit standards. Generally, FHA loans originated before December 1, 1986, are freely assumable. For loans originated after this date, the assumability depends on specific criteria and lender approval.

VA Loans: Guaranteed by the U.S. Department of Veterans Affairs, VA loans are designed for eligible military service members, veterans, and their families. A significant advantage of VA loans is that all of them are assumable, regardless of the origination date. However, the buyer assuming the loan must still meet the VA’s eligibility requirements and the lender’s creditworthiness standards.

USDA Loans: Backed by the U.S. Department of Agriculture, USDA loans aim to make homeownership more accessible in rural and less populated areas. USDA loans are assumable, but the assuming buyer must meet specific eligibility criteria, including income limits and property location restrictions.

How Assumable Mortgages Work

The process of assuming a mortgage involves the buyer taking over the seller’s existing mortgage, including the current interest rate, loan balance, and remaining loan term. Here’s a step-by-step breakdown of how assumable mortgages work:

1. Seller Notification: The seller notifies their lender of their intention to sell the property and have the buyer assume the mortgage.
2. Buyer Qualification: The buyer applies to assume the mortgage and must meet the lender’s qualification requirements, which typically include a credit check, proof of income, and a down payment (if applicable).
3. Loan Assumption Package: If the buyer is approved, the lender provides a loan assumption package that outlines the terms of the assumption, including the interest rate, loan balance, and any fees associated with the process.
4. Closing: At closing, the buyer signs the necessary documents to assume the mortgage and becomes responsible for making the monthly mortgage payments.

When to Consider Assuming a Mortgage

Assuming a mortgage can be a smart financial move in certain situations. Here are some scenarios when buyers may want to consider assuming a mortgage:

1. Rising Interest Rate Environment: When interest rates are rising, assuming a mortgage with a lower interest rate can result in significant savings over the life of the loan.
2. Seller Concessions: In some cases, sellers may offer concessions, such as paying the assumption fee or providing a credit towards closing costs, to incentivize buyers to assume their mortgage.
3. Quick Closing: If the buyer needs to close on the property quickly, assuming a mortgage can often result in a faster closing process compared to obtaining a new mortgage.
4. Limited Down Payment Funds: If the buyer has limited funds for a down payment, assuming a mortgage with a lower down payment requirement can make homeownership more accessible.

Pros and Cons of Assumable Mortgages

Assumable mortgages can offer several benefits to both buyers and sellers, but there are also some potential drawbacks to consider.

Pros:

1. Lower Interest Rates: In a rising interest rate environment, assumable mortgages can provide buyers with access to lower interest rates than what’s currently available in the market.
2. Reduced Closing Costs: Assuming a mortgage can often result in lower closing costs for the buyer, as they may not need to pay for certain items, such as a new appraisal or origination fees.
3. Faster Closing Process: Since the buyer is assuming an existing mortgage, the closing process can be quicker than obtaining a new mortgage.

Cons:

1. Limited Availability: Not all mortgages are assumable, and those that are may have specific requirements that limit their availability.
2. Larger Down Payment: In some cases, the buyer may need to make a larger down payment to assume the mortgage, especially if the seller has little equity in the property.
3. Potential for Hidden Issues: If the seller has missed payments or the property has undisclosed issues, the buyer may inherit these problems when assuming the mortgage.

Requirements for Assuming a Mortgage

To assume a mortgage, buyers must meet certain requirements set by the lender. These requirements can vary depending on the type of loan and the lender’s specific guidelines. Some common requirements for assuming a mortgage include:

1. Credit Score: Lenders typically require a minimum credit score of 620 to assume a mortgage. However, some lenders may have higher credit score requirements, especially for conventional loans.
2. Debt-to-Income Ratio: The buyer’s debt-to-income ratio (DTI) must meet the lender’s guidelines. DTI is calculated by dividing the buyer’s monthly debt obligations by their gross monthly income. Interesting Fact: According to a 2023 study by the Consumer Financial Protection Bureau, the average DTI for approved mortgage assumptions was 36%.
3. Income and Employment: Buyers must provide proof of stable income and employment history. Lenders typically require at least two years of steady employment and income.
4. Down Payment: In some cases, buyers may need to make a down payment to assume the mortgage. The down payment amount can vary depending on the lender’s requirements and the seller’s equity in the property.
5. Property Appraisal: The lender may require a new property appraisal to ensure that the home’s value is sufficient to cover the remaining loan balance.

Costs Associated with Assuming a Mortgage

While assuming a mortgage can often result in lower closing costs compared to obtaining a new mortgage, there are still some costs associated with the process. These costs can include:

1. Assumption Fee: Lenders may charge an assumption fee to cover the administrative costs of transferring the mortgage to the new buyer. 
2. Credit Report Fee: Buyers may need to pay a fee to obtain their credit report and score as part of the mortgage assumption process.
3. Title Search and Insurance: Buyers may need to pay for a title search and title insurance to ensure that there are no outstanding liens or claims on the property.
4. Property Taxes and Insurance: Buyers will be responsible for paying property taxes and homeowners insurance from the date of assumption onwards.
5. Escrow Funds: If the seller has funds in an escrow account for property taxes and insurance, the buyer may need to reimburse the seller for these funds at closing.

How to Assume a Mortgage Step by Step

Assuming a mortgage involves several steps to ensure a smooth transfer of the loan from the seller to the buyer. Here’s a step-by-step guide to assuming a mortgage:

Determining if Your Mortgage is Assumable

Not all mortgages are assumable, so it’s essential for buyers to determine if the seller’s mortgage can be assumed before proceeding with the home purchase. Here are some steps to determine if a mortgage is assumable:

1. Review Loan Documents: The first place to look is the seller’s original loan documents. Look for language that specifically addresses loan assumptions, such as “assumable” or “due on sale.”
2. Contact the Lender: If the loan documents are unclear or unavailable, buyers can contact the lender directly to inquire about the assumability of the mortgage.
3. Check the Mortgage Type: Certain types of mortgages, such as FHA, VA, and USDA loans, are generally assumable. Conventional mortgages originated after 2008 are typically not assumable due to the “due on sale” clause.

Assuming a Mortgage with Poor Credit

While assuming a mortgage can be a great option for buyers with less-than-perfect credit, it’s important to note that lenders still have credit score requirements for mortgage assumptions. However, there are some steps buyers with poor credit can take to improve their chances of successfully assuming a mortgage:

1. Improve Credit Score: Buyers with poor credit should take steps to improve their credit score before applying to assume a mortgage. This can include paying down debt, disputing errors on credit reports, and making all payments on time.
2. Provide a Larger Down Payment: Offering a larger down payment can help compensate for a lower credit score and demonstrate the buyer’s financial commitment to the lender.
3. Add a Co-Signer: Having a co-signer with a strong credit profile can help buyers with poor credit qualify for a mortgage assumption.
4. Choose a Government-Backed Loan: FHA, VA, and USDA loans often have more lenient credit score requirements compared to conventional loans.

Assumable Mortgages in Divorce or Death Situations

Assumable mortgages can be particularly useful in situations involving divorce or the death of a mortgagor. In these cases, the ability to assume a mortgage can help simplify the process of transferring property ownership and avoid the need to obtain a new mortgage.

Divorce: In a divorce situation, if one spouse wishes to keep the home and the mortgage is assumable, they may be able to assume the mortgage and remove the other spouse from the loan. This can be especially beneficial if the assuming spouse has a lower income or credit score that would make it difficult to qualify for a new mortgage.

Death: If a mortgagor dies and the mortgage is assumable, the heir or beneficiary of the property may be able to assume the mortgage rather than having to pay off the loan or obtain a new mortgage. This can help ease the financial burden on the heir and allow them to keep the property.

Final Thoughts on Assumable Mortgages

In today’s fluctuating interest rate environment, assumable mortgages offer a unique opportunity for both buyers and sellers. While they may not be suitable for everyone, understanding the nuances of assumable mortgages can equip you with valuable knowledge to navigate the housing market and potentially secure a more favorable home loan.

It’s crucial to remember that the terms of an assumable mortgage, along with its benefits and drawbacks, can vary depending on the type of loan and specific circumstances. Consulting with a financial advisor or mortgage professional can provide personalized guidance and ensure you make an informed decision about whether an assumable mortgage is the right fit for your homeownership goals.

For the latest financial guides and tips, be sure to follow Financer.com. Our expert team is dedicated to providing you with the most up-to-date and accurate information to help you navigate the complex world of personal finance.

Frequently Asked Questions