What is an assumable mortgage?

Most of the time when you buy a house, you choose a lender, apply for a mortgage, and pay that mortgage off over a set time period. However, in some cases, you can take on an existing mortgage rather than applying for a brand new one.

This process is called an assuming mortgage and there are a number of reasons why a seller may offer this option to a buyer and why a buyer might want to take advantage.

How does mortgage assumption work?

As the name suggests, an assumable mortgage is when a buyer “assumes” or takes on an existing mortgage from someone else. In this financing agreement,  an outstanding mortgage and its terms transfer from a present borrower to the new buyer. As such, the remaining balance, mortgage rate, repayment period, and other specific loan terms stay the same — the only thing that changes is who is responsible for the debt.

Assumable mortgages allow buyers to avoid the rigorous process of obtaining their own mortgage and potentially lock in more favorable rates in exchange for taking a home seller out of debt. When interest rates are high, borrowing is more expensive, which can make an assumable mortgage that was likely signed with a lower interest rate more attractive to buyers.

How do you assume a mortgage?

When a buyer assumes a mortgage, they take on the remaining loan balance at the original terms. But it’s important to note that the housing market has likely changed and the previous owner has gained equity in the home. 

An assumable mortgage doesn’t account for equity. If the home is worth more than when the original loan was issued, the buyer must cover the difference with cash or another loan.

Example

Say a seller has a $400,000 loan balance on a home, and found a buyer who has agreed to pay $600,000. The buyer inherits that $400,000 loan balance but will still need to come up with $200,000 to pay the seller for the equity that they’ve built in the home.

Many buyers who assume a mortgage take out a home equity loan. This second mortgage helps buyers who can’t cover the equity cost with cash. If the buyer in the previous example only had $100,000 in cash, they would take out a home equity loan for another $100,000, making their total mortgage debt $500,000 — essentially the same as if they were to buy the home with a single traditional mortgage.

However, the assumed mortgage may have a lower interest rate while the new mortgage is for a significantly less amount than what you would have to take out in a traditional mortgage scenario. As such, two monthly payments could still be a fair amount less than the single ordinary one.

What types of loans can be assumed?

While all types of mortgage loans can technically be assumed, conventional loans are assumable only in special cases. Government-backed loans — Federal Housing Administration (FHA) loans, U.S. Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans — are generally assumable, as long as the lender approves the sale.

Conventional loans

In most cases, conventional loans are not assumable because most mortgage contracts contain a due-on-sale clause, which demands that you pay the entire remaining loan amount as soon as you sell the property.

If a seller has a conventional adjustable-rate mortgage (ARM) and meets certain financial qualifications, the mortgage could be eligible for assumption. As long as a borrower doesn’t exercise any option to convert the loan to a fixed-rate mortgage, a conventional ARM would likely be assumable.

FHA loans

For FHA loans originated on or after December 15, 1989, a lender must approve an assumable mortgage to a creditworthy buyer. Under special circumstances like the death of the mortgage holder and inherited property, a lender doesn’t need to check the creditworthiness of the buyer or approve the sale.

VA loans

All VA loans are assumable, but with additional rules and qualification requirements.

• Loans originated before March 1, 1988, are “freely assumable,” which means they don’t need to be approved.
• Loans originated after March 1, 1988, are assumable as long as the lender approves, the buyer is creditworthy, and someone pays a processing fee.
• Although VA loan borrowers typically must be active-duty service members, veterans, or eligible surviving spouses to qualify, a person assuming a VA loan doesn’t have to be military-affiliated.

→ Learn more about assuming VA loans

USDA loans

Most USDA loans — which are offered to buyers in rural specially qualified areas — are assumable, typically in one of two ways:

• New rates and terms transfer responsibility for the mortgage debt to the buyer but also adjusts the debt by reamortizing it with more current rates and terms.
• Same rates and terms assumable mortgages are only available in special circumstances; usually in transactions between family members. These cases preserve the original mortgage rates and terms and are not subject to any credit review or bank approval.

Why would you use an assumable mortgage?

Assuming a mortgage have benefits and disadvantages for both buyer and seller.

Pros for buyers

• In a high-interest rate environment, buyers can lock in lower interest rates and, therefore, a lower monthly payment.
• You may not have to secure a new line of credit or undergo a credit check.
• Lower out-of-pocket costs when a seller’s equity is low.
• Generally there are fewer closing costs, as certain closing costs on assumable mortgages are capped.

Cons for buyers

• If a home’s purchase price exceeds the mortgage balance by a significant amount, you’ll have to take out a second mortgage. If you have poor credit, your interest rate on this second loan could drive your monthly payment higher than you’d like. This could also force you to put down a very high down payment.
• If you do have to take out a second mortgage, you may be limited in your choice of lender.
• Having two loans increases the risk of default, especially when one loan has a higher interest rate.
• Most sellers won’t sell to you through assumption unless you meet their lender’s credit and income requirements.

Pros for sellers

• If you have low equity, a willingness to accept an assumable mortgage may boost the desirability of your house and expedite the closing process.
• Typically, there’s no appraisal when transferring a mortgage, which can avoid issues with the bank.

Cons for sellers

• In a competitive market, assumable mortgages may limit how much you can sell your house for as it will limit your market.

How to qualify for an assumable mortgage

In normal circumstances that don’t involve inheritance or family transfer in certain types of loans, buyers who want to assume a mortgage must still go through a vetting process. 

Like a traditional mortgage, lenders will check a buyer’s credit score and debt-to-income ratio (DTI). They may also require additional information like employment history, income information, and asset verification.

Even the most rigorous assumable mortgage processes, however, are less intensive than applying for a traditional mortgage.