Assumable Mortgages 2024: How They Work, Benefits, and Insights (2024)

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• When a mortgage is assumable, it means the current borrower can transfer the loan to the buyer of their home.
• In general, only government-backed mortgages are assumable.
• To assume a mortgage, you'll need to have enough cash to cover the difference between the loan balance and the home price.

With mortgage rates still well above their pre-pandemic levels, borrowers are desperate for ways to keep their monthly payments low.

One option is to buy a home with an assumable mortgage, which allows you to take over the seller's loan — and the existing mortgage rate it comes with. If the numbers are right, it could mean snagging a rate significantly lower than today's market rates.

Here's what to know about these loans.

Introduction to assumable mortgages

An assumable mortgage is a type of home loan that can be transferred to a new borrower. They can be a clever way to get a lower mortgage rate than what is currently available on new loans.

What is an assumable mortgage?

With an assumable mortgage, a home seller transfers their existing mortgage to the buyer of the mortgaged property so the buyer doesn't have to apply for a new mortgage.

As the buyer, you'll take on the seller's terms, including the interest rate, outstanding balance, remaining term length, and mortgage servicer. Your down payment for the house must make up the difference between the sale price and the amount owed. For example, let's say a home is for sale for $400,000, and the seller still owes $350,000. You'll need to make a $50,000 down payment to cover the difference.

To assume a mortgage, you'll need to meet the lender's requirements, including its minimum credit score and maximum debt-to-income ratio. The lender will approve you, and the seller can request to be released from the mortgage.

Key benefits of assumable mortgages

The main benefit of assumable mortgages for buyers is that they allow you to get lower interest rates (and payments) than you would have access to on the open market.

For sellers, they can be a great marketing tool, especially in a high-rate environment. More buyers may be interested in a house — and willing to pay more for it — if it comes with an assumable low-rate loan.

There's also no home appraisal when you assume a mortgage, which could save you time and hundreds of dollars in closing costs.

How assumable mortgages work

If you're interested in an assumable mortgage, it's important to understand how the process works before diving in.

The process of assuming a mortgage

The exact process depends on what type of assumption you're doing. With a simple assumption, you'll just take over payments from the seller, and the lender is not involved. This comes with risk for the seller, though, and is not very common.

Novation assumptions require the lender's involvement. They'll want to verify the new buyer's finances, review documentation, and make sure they meet the requirements of the loan program before moving forward.

Eligibility requirements for buyers

The requirements for loan assumption depend on what loan program is involved. For USDA loans, for example, you'll need to fall under the income threshold set by the Department of Agriculture for your area. Learn more about each assumable loan program below.

Responsibilities of the original borrower

If the assumable loan is transferred privately, without the lender approving the buyer or verifying the qualifications, the original loan borrower remains liable for the loan. If the new borrower fails to make payments, the original borrower would be on the hook for them — or face a default, foreclosure, and credit damage.

In novation assumptions, the lender verifies the new borrower meets the loan qualifications and officially transfers liability to them.

Types of assumable mortgages

Typically, you can't assume a fixed-rate conventional mortgage. In some cases, you may be able to assume an adjustable-rate conventional mortgage.

There are three main types of mortgages that are assumable, and they're all government-backed mortgages: VA, FHA, and USDA loans.

VA loans

For VA loans, the original buyer must be an active military member, veteran, or family member. Surprisingly, VA loan assumption requirements don't stipulate that new borrowers meet these same standards.

The lender and regional VA loan office will need to approve you to assume a VA mortgage. The exception is for VA mortgages that originated before March 1, 1988 — then you don't need lender or office approval.

FHA loans

FHA loans, which are loans guaranteed by the Federal Housing Administration, are also assumable. As the buyer in the FHA assumable mortgage process, you must meet the lender's criteria for an FHA loan. In most cases, this means at least a 580 credit score and a debt-to-income ratio of 43% or lower.

USDA loans

USDA loans are for buyers who are earning a low-to-moderate income and buying a home in a rural area. To assume a USDA mortgage, you'll need to meet income requirements for your county. You'll also need to meet the lender's credit score and debt-to-income ratio requirements.

Benefits of assumable mortgages

There are three main benefits of assumable mortgages:

Potential for lower interest rates

Mortgage rates have remained high over the last year. Assuming a mortgage could allow you to get a much lower mortgage rate.

Simplified approval process

You usually won't need an appraisal when assuming a loan, and in some cases, you may not need lender approval at all.

Savings on closing costs

Closing costs are often lower with assumable loans. You won't need to pay points, nor are there appraisal fees.

Drawbacks of assumable mortgages

There are some drawbacks to assumable loans, including:

Limited availability

Not all loan types are assumable. Additionally, borrowers with low rates may be less apt to sell their homes, so there are likely fewer properties to choose from with this option.

Qualification challenges for buyers

Most of the time, you'll need to meet certain lender requirements before you'll be allowed to assume a loan. This may mean you'll need a certain credit score, debt-to-income ratio, and down payment to qualify.

Potential liability for original borrower

Depending on the type of loan assumption, the original borrower could remain liable for the loan even after the new borrower takes over. This could be problematic if the new borrower fails to make payments.

Comparing assumable mortgages with traditional mortgages

Here's how assumable mortgages measure up to traditional mortgages you can get on the open market.

Interest rate comparison

Assumable mortgages can allow you to get much lower interest rates that aren't available to new borrowers. This includes the record-breaking low rates seen during the pandemic.

Approval process comparison

The approval process depends on what type of assumption you're doing. In some cases, there may be no approval whatsoever, and you simply take over the old borrower's payments. Most of the time, though, you'll need to meet certain requirements, and the lender will evaluate your finances before approving you to assume the loan. In this case, the approval process would look similar to the traditional mortgage process.

Cost and fees comparison

Assumable mortgages often have lower fees and closing costs than traditional mortgage loans. This could save you a sizable sum at the outset of your loan.

How to assume a mortgage

To assume a mortgage, you first need to find a home with an assumable loan attached to it. See below for next steps.

Step-by-step guide to assuming a mortgage

Simple mortgage assumption doesn't require much other than taking over the old borrower's payments. With a novation assumption, though, you'll need to:

1. Provide the information and documentation required by the lender.
2. Pay your closing costs and down payment.
3. Sign the promissory note, which officially makes you the responsible party on the loan.

It may be smart to work with a real estate attorney when assuming a loan, as they can guide you through the process.

Necessary documentation

If your assumption requires lender approval, you'll need to submit income-related documents like pay stubs, bank statements, tax returns, and W-2s to the lender. Depending on how you earn income, you may need other items, too, like a profit and loss statement, if you own your own business.

Common pitfalls to avoid

The biggest pitfall with assumable loans is not having enough upfront cash to make it happen. These loans often require higher-than-usual down payment amounts, since you need to cover the original borrower's equity, too. For example, if you're buying a $500,000 home, but the original borrower's loan is only $300,000, you'd need to bring $200,000 to the table.

Another pitfall, at least in simple loan assumptions that don't involve lender approval, you may take on higher payments than you can comfortably afford. Make sure to run the numbers before you take over a loan — especially if the lender's not qualifying you first.

Alternatives to assumable mortgages

Assuming a mortgage isn't the only way to buy a house more affordably. You can also use:

Traditional mortgage loans

Taking out a new mortgage loan is always an option. You'll need to meet the requirements of the lender and loan program, and you'll owe the full range of closing costs, though. You will also get an interest rate based on current market conditions.

Lease-to-own arrangements

If you don't want to get stuck with a high mortgage rate, you could choose a rent-to-own home. These allow you to rent a property, with a portion of each payment going toward a down payment on the house. Once your lease ends, you put that down payment toward the house, and take out a mortgage loan then. This could be a good option if you think rates will drop over the next few years, when your lease would end.

Assumable mortgage FAQs