What Is an Assumable Mortgage?
An assumable mortgage is a type of home financing arrangement where an outstanding mortgage and its terms are transferred from the current owner to the buyer. By assuming the previous owner's remaining debt, the buyer can avoid obtaining their own mortgage, which may come with higher interest rates. Different types of loans can qualify as assumable mortgages, though there are some special considerations to keep in mind.
Key Takeaways
- An assumable mortgage is an arrangement in which an outstanding mortgage and its terms are transferred from the current owner to a buyer.
- When interest rates rise, an assumable mortgage is attractive to a buyer who takes on an existing loan with a lower rate.
- USDA, FHA, and VA loans are assumable when certain criteria are met.
- The buyer need not be a military member to assume a VA loan.
- Buyers must still qualify for the mortgage to assume it.
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Understanding Assumable Mortgages
If you are buying a house, you may take out a mortgage from a lending institution to finance the purchase of the home or property. The contractual agreement for repaying the mortgage includes paying the principal payments plus interest to the lender.
If you decide to sell your home later, you may be able to transfer the mortgage to the homebuyer. In this case, the original mortgage taken out is assumable.
An assumable mortgage allows a homebuyer to assume the current principal balance, interest rate, repayment period, and any other contractual terms of the seller's mortgage. Rather than going through the rigorous process of obtaining a home loan from a bank, a buyer can take over an existing mortgage.
There could be a cost-saving advantage if current interest rates are higher than the interest rate on the assumable loan. In a period of rising interest rates, the cost of borrowing also increases. When this happens, borrowers will face high interest rates on any loans for which they are approved.
An assumable mortgage may have a lower interest rate, an attractive feature to buyers. If the assumable mortgage has a fixed interest rate, it will not be impacted by rising interest rates. A mortgage calculator can be a good resource to budget for the monthly cost of your payment.
An assumable mortgage is attractive to buyers when the existing mortgage rate is lower than current market rates.
What Types of Loans Are Assumable?
Some of the most popular types of mortgages are assumable:
- Federal Housing Authority (FHA)
- Veterans Affairs (VA)
- U.S. Department of Agriculture (USDA)
If you are a buyer who wishes to assume a mortgage from a seller, you must meet specific requirements and receive approval from the agency sponsoring the mortgage.
FHA Loans
FHA loans are assumable when both parties meet the requirements for the assumption. For instance, the property must be used by the seller as their primary residence. If you were the buyer, you must first verify that the FHA loan is assumable and then apply as you would for an individual FHA loan. The seller's lender will verify that you meet the qualifications, including being creditworthy. If approved, you will then assume the mortgage. However, until the seller is released from the loan, they are still responsible for it.
VA Loans
The Department of Veterans Affairs offers mortgages to qualified military members and spouses of military members. However, to assume a VA loan, you need not be a member of the military to qualify.
Keep in mind that the lender and the regional VA loan office will need to approve you for the loan assumption. Plus, the seller may prefer to accept an offer from a qualified military borrower so that they can keep their VA loan entitlement for another home purchase. Otherwise, the entitlement stays with the property until the mortgage is paid off.
For loans initiated before March 1, 1988, buyers may freely assume the VA loan. In other words, you would not need the approval of the VA or the lender to assume the mortgage.
USDA Loans
USDA loans are offered to buyers of rural properties. They require no down payment and often have low interest rates. To assume a USDA loan, you must meet the standard qualifications, such as meeting credit and income requirements, and receive approval from the USDA to transfer title.
Most USDA loan assumptions involve new rates and terms. However, some assumptions such as title transfers between family members may involve the same rate and terms. Even if you meet all requirements and receive approval, the mortgage cannot be assumed if the seller is delinquent on payments.
Important
Conventional loans backed by Fannie Mae and Freddie Mac are generally not assumable, though exceptions may be allowed for adjustable-rate mortgages. Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
Advantages and Disadvantages of Assumable Mortgages
Pros
Rate on the mortgage may be lower than current market rates
May not need to apply for a new mortgage
If seller's home equity is low, there are less out-of-pocket costs for the buyer
Cons
May need a substantial down payment when the seller's home equity is high
Lenders may not cooperate when a second mortgage is needed
With two mortgages, the risk of default increases
The advantages of acquiring an assumable mortgage in a high interest rate environment are limited to the amount of existing mortgage balance on the loan or the home equity. For example, if you are purchasing a home for $250,000 and the seller's assumable mortgage only has a balance of $110,000, you will need to make a down payment of $140,000 to cover the difference. Or you will need a separate mortgage to secure the additional funds.
A disadvantage is when the home's purchase price exceeds the mortgage balance by a significant amount, requiring you to obtain a new mortgage. Depending on your credit profile and current rates, the interest rate may be considerably higher than the assumed loan.
Usually, you will take out a second mortgage on the existing mortgage balance if the seller’s home equity is high. You may have to take out the second loan with a different lender from the seller’s lender, which could pose a problem if both lenders do not cooperate with one another. Also, having two loans increases the risk of default, especially when one has a higher interest rate.
If the seller’s home equity is low, however, the assumable mortgage may be an attractive acquisition. If the value of the home is $250,000 and the assumable mortgage balance is $210,000, you only need to put up $40,000. If you have this amount in cash, you can pay the seller directly without having to secure another credit line.
Assumable Mortgage Transfer Approval
The final decision over whether an assumable mortgage can be transferred is not left to the buyer and seller. The lender of the original mortgage must approve the mortgage assumption before the deal can be signed off on by either party. The homebuyer must apply for the assumable loan and meet the lender’s requirements, such as having sufficient assets and being creditworthy.
A seller is still responsible for any debt payments if the mortgage is assumed by a third party unless the lender approves a release request releasing the seller of all liabilities from the loan.
If approved, the title of the property is transferred to the buyer who makes the required monthly repayments to the bank. If the transfer is not approved by the lender, the seller must find another buyer that is willing to assume the mortgage and has good credit.
A mortgage that has been assumed by a third party does not mean that the seller is relieved of the debt payment. The seller may be held liable for any defaults which, in turn, could affect their credit rating. To avoid this, the seller must release their liability in writing at the time of assumption, and the lender must approve the release request releasing the seller of all liabilities from the loan.
Frequently Asked Questions (FAQs)
What Does Assumable Mean?
Assumable refers to when one party takes over the obligation of another. In terms of an assumable mortgage, the buyer assumes the existing mortgage of the seller. When the mortgage is assumed, the seller is often no longer responsible for the debt.
What Does Not Assumable Mean?
Not assumable means that the buyer cannot assume the existing mortgage from the seller. Conventional mortgages are non-assumable. Some mortgages have non-assumable clauses, preventing buyers from assuming mortgages from the seller.
How Does An Assumable Loan Work?
To assume a loan, you must qualify with the lender. If the price of the house exceeds the remaining mortgage, you must remit a down payment worth the difference between the sale price and the mortgage. If the difference is substantial, you may need to secure a second mortgage.
How Do I Know If My Mortgage Is Assumable?
Certain types of home loans are assumable. For example, USDA, VA, and FHA loans are assumable. Each agency has specific requirements that both parties must fulfill for the loan to be assumed by the buyer. The USDA requires that the house is in a USDA-approved area, the seller must not be delinquent on payments, and the buyer must meet certain income and credit limits. The buyer must confirm with the seller and the seller's lender if the loan is assumable.
Is an Assumable Mortgage Good?
When current interest rates are higher than an existing mortgage's rates, assuming a loan may be the favorable option. Also, there are not as many costs due at closing. On the other hand, if the seller has a considerable amount of equity in the home, the buyer will either have to pay a large down payment or secure a second mortgage for the balance not covered by the existing mortgage.
The Bottom Line
An assumable mortgage may be attractive to buyers when current mortgage rates are high and because closing costs are considerably lower than those associated with traditional mortgages. However, if the owner has a lot of equity in the home, the buyer may need to pay a substantial down payment or secure a new loan for the difference in the sale price and the existing mortgage. Also, not all loans are assumable, and if so, the buyer must still qualify with the agency and lender. If the benefits outweigh the risks, an assumable mortgage might be a good option for homeownership.
