In this article:
- How Does an Assumable Mortgage Work?
- Pros of an Assumable Mortgage
- Cons of an Assumable Mortgage
- How to Assume a Mortgage
An assumable mortgage is a mortgage that can be transferred when a home changes owners. Mortgage assumptions are a popular topic in 2024 because many people bought a home or refinanced their mortgage when rates were under 3% in 2020 and 2021.
Today's rates are much higher, and buyers can benefit from assuming an existing low-rate mortgage. Sellers also might be able to get more interest in their home if they advertise that it has an assumable loan. But there are also lots of hurdles that can get in the way.
How Does an Assumable Mortgage Work?
Assuming a mortgage transfers the responsibility for the mortgage to a new person without changing the mortgage's terms.
Sometimes, this happens when you transfer a mortgage to a family member or friend, after a divorce, during a foreclosure or when a property is inherited. But here, we'll focus on assuming a mortgage when you're buying a home.
The main benefit—and why all of this matters—is that transferring a mortgage might save the buyer a lot of money. Based on results from Experian's mortgage calculator, here are the potential monthly mortgage payments on a $400,000 home with a 20% down payment:
| Monthly Loan Payments from 3% to 6% ($320,000 Mortgage) | ||
|---|---|---|
| Interest Rate | Monthly Payment | Increase vs. 3% |
| 3% | $1,657.47 | N/A |
| 4% | $1,836.06 | $178.59 |
| 5% | $2,026.16 | $368.69 |
| 6% | $2,226.90 | $569.43 |
These loans all have 30-year terms, which wouldn't be the case if you assumed an existing loan. But it still demonstrates how a 3% rate could save someone over $500 a month compared with getting a 6% rate.
It's not all easy savings, though, and there are a few high-level points to know about assumable mortgages:
- Most mortgages aren't assumable. Conventional loans generally have a "due on sale" clause and have to be paid off when the home changes hands. Government-backed mortgages, such as FHA and VA loans, are assumable, as are some USDA adjustable-rate mortgages (ARMs). They're in the minority of outstanding mortgages, but may be the most popular in specific areas, such as near military bases.
- All parties have to agree. Even with an assumable loan, the lender, seller and buyer have to agree to the assumption. The lender may review the buyer's eligibility and creditworthiness to confirm they're eligible to take over the loan.
- It's not a quick and easy process. A loan assumption adds even more complexity to a home sale, and it might take 45 to 90 days to close on the home.
Loan assumptions aren't especially common because there's limited availability, and they only make sense when rates increase. Loan servicers also don't necessarily make a profit on assumptions, so they're less motivated to offer them. As a result, many real estate agents and loan officers aren't familiar with the process.
However, that may be changing. New services are making it easier to find homes with assumable loans (more on those later). And, in May 2024, the U.S. Department of Housing and Urban Development (HUD) increased the maximum allowed fee that servicers can charge for loan assumptions from $900 to $1,800.
Pros of an Assumable Mortgage
- Could lead to significant savings: If you can assume a loan with a lower interest rate, you may be able to lower your monthly payment and save a lot of money over the lifetime of the loan.
- Lower rate might increase your buying power: A lower interest rate also might make buying a more expensive home feasible.
- Lower closing costs: There could be a fee for processing the loan assumption, but because you're taking over a mortgage, there won't be as many upfront closing costs. For example, you might not need to pay for a new appraisal or loan origination fees.
Cons of an Assumable Mortgage
- Could require a lot of cash: You'll need to cover the difference between the current balance and what you're paying for the house. For example, if you offer $450,000 and the current loan balance is $200,000, you'll need to pay $250,000 to assume the mortgage.
- Can be difficult to find: Home listings won't necessarily tell you if the loan is assumable, and some real estate agents don't know what to look for when trying to find homes with assumable mortgages.
- Sellers may lose VA their loan entitlement: Anyone can assume a VA loan, and eligible buyers can substitute the seller's entitlement with their own. However, if the buyer isn't eligible for a VA loan, the seller's VA loan entitlement stays tied to the mortgage until it's paid off.
- You still need to qualify: The lender will review the buyer's finances and credit and make sure they qualify for the loan.
- Closing can take longer: Unless the buyer offers a much higher price, sellers might prefer offers from buyers who don't want to assume the mortgage.
How to Assume a Mortgage
Here are several steps you can take if you're looking to buy a home and take over a low-rate mortgage.
1. Look for Homes With Assumable Mortgages
Some companies are creating searchable lists of homes with assumable loans or adding filters to their search tools:
You can also ask your real estate agent to check the multiple listing service (MLS) to see if the home has an FHA, VA or USDA loan. But loan eligibility is only the starting point—you'll still need to qualify and have a competitive offer, and the seller has to agree.
2. Understand Your Cost to Close
Although closing costs might be lower with an assumable mortgage, it won't be free. There could still be upfront costs to buy and transfer the home, and some of the websites that connect buyers and sellers charge a fee for their services. And, as mentioned, you'll need to have enough money to cover the difference between the seller's outstanding balance and the sale price.
You might find a lender who offers a second mortgage to cover some of the difference. Or, you may be able to use alternative financing, such as a hard money loan or a loan from a family member, as a temporary bridge loan. Once you own the home, you might be able to get a home equity line of credit or home equity loan to pay off the bridge loan.
3. Prepare for the Loan Application
The application and underwriting process might be similar to applying for a new mortgage. You'll need to share documents to verify your identity, income and assets, and agree to a credit check. And you'll have to wait for the loan's servicer to review your application and eligibility.
4. Close on Your New Home
Once the assumption gets approved, you'll need to sign all the usual documents to transfer the home's title and register your purchase. But there's at least one added step: The lender gives the seller a release of liability, clearing them of their responsibility for the mortgage.
Frequently Asked Questions
You'll need to qualify for the mortgage that you're assuming, which means you may need a credit score of at least 500 for an FHA loan or 620 for a VA loan. Although a higher credit score won't lead to a lower interest rate—because you're taking over the current loan's rate—it might increase your chances of approval. Additionally, if you need a second mortgage, that lender may have higher credit score requirements.
You will need to cover the difference between the loan's current balance and your purchase price, which might be much higher than a traditional 3% to 20% down payment. Some lenders now offer a second mortgage for buyers who want to finance the difference. If you're getting a second mortgage, you may be able to borrow around 80% to 85% of the purchase price—equivalent to a 15% to 20% down payment.
If you assume an FHA loan with a mortgage insurance premium (MIP), the premium will remain based on the original loan's terms. In many cases, this means the premium stays for the life of the loan. You can remove the MIP if you refinance, but your new mortgage might have a higher interest rate.
Improve Your Credit When Home Shopping
Whether you try to assume a mortgage or qualify for a new loan, your credit history and scores will affect your eligibility. Check your credit report for free from Experian, and get monthly updates, FICO® Score☉ monitoring and real-time alerts about changes in your report. You can also log in to see what's helping and hurting your credit score the most, and take steps to improve your credit while you're looking for your next home.
