What Is an Assumable Mortgage?

Most of us would love to travel back in time and get a mortgage with a historically low, pandemic-era interest rate. The next best thing is to buy a house with an assumable mortgage. Instead of applying for a brand new loan, you’ll take over — or “assume” — the existing one. If that loan has a low interest rate, you can sit back and enjoy the perks of having a rate far below what the current market offers.

Think of an assumable mortgage as a way to step into the seller’s shoes: You’ll take their place as the person responsible for a loan that’s already partway paid off. That loan likely needs to be a government-backed mortgage, however, since most conventional loans aren’t assumable.

Why choose an assumable mortgage?

With current mortgage rates sitting at a relatively high 7.11% for 30-year loans, who doesn’t want to unlock access to lower interest rates? An assumed mortgage opens that door by offering a way to take over a current owner’s mortgage — including the repayment period and interest rate. At the end of 2023, more than half of U.S. homeowners had rates under 4% and sites with listings for homes with assumable mortgages currently boast rates as low as 2%. Assuming one of these loans, rather than taking out a brand new mortgage, could save you tens of thousands of dollars over the life of that loan.

Additionally, sellers who can offer loan assumption may have a leg up on others because they can provide that opportunity to lock in low interest rates. In some cases, they can even sell their home at a higher price because the lower interest rate offsets the higher loan amount.

Are FHA loans assumable?

Most government-backed loans, including all FHA loans, are assumable, as long as the lender approves the sale. However, additional rules apply:

• For loans originated on or after Dec. 15, 1989: If the buyer is creditworthy, the lender must approve a sale by assumption and transfer responsibility to the buyer. Loans issued before that date may be assumable, but the lender isn’t required to release the seller from liability.
• Under special circumstances (such as death and inheritance): The lender isn’t entitled to check the buyer’s creditworthiness in cases of death or inheritance, and doesn’t have to approve the sale.

Are VA loans assumable?

All VA loans are assumable, but with additional rules and requirements that govern exactly how:

→ Loans originated before March 1, 1988, are “freely assumable,” which means a lender doesn’t have to approve the assumption.
→ Loans originated after March 1, 1988, are assumable as long as the lender approves and the buyer is deemed creditworthy and pays a processing fee.

Anyone assuming a VA loan will have to pay the VA funding fee, unless they qualify for an exemption.

Can a non-veteran assume a VA loan?

Yes, anyone can assume a VA loan, even if they haven’t served in the military. This is notable because borrowers usually have to be active-duty service members, veterans or eligible surviving spouses in order to qualify for a VA loan.

Are USDA loans assumable?

USDA loans are assumable in two ways:

→ With new rates and terms. Most USDA loans are assumable in this way, which transfers responsibility for the mortgage debt to the buyer at the same time as it adjusts the loan terms. When re-amortizing the debt with new rates and terms, the monthly payments and interest costs can change.
→ With the same rates and terms. Available only in special circumstances, this type of assumption is usually reserved for family members who are exchanging ownership of a property. In these cases, the original mortgage’s rates and terms are preserved and neither a review of the buyer’s creditworthiness nor a property appraisal is required.

When are conventional loans assumable?

Conventional loans aren’t usually assumable, because the mortgage contract usually contains a due-on-sale clause, which allows the lender to demand the entire remaining loan amount once the property is sold. That would mean that, as soon as a buyer assumed the loan, the lender could step in and hand them a bill for hundreds of thousands of dollars. Not many buyers want to take that risk.

However, if you have a conventional adjustable-rate mortgage (ARM), it’s possible that your mortgage is eligible for assumption. Fannie Mae — one of the two mortgage agencies that sets rules for conventional loans — allows for assumable ARMs as long as the borrower agrees to give up the option to convert the loan to a fixed-rate mortgage. If your conventional ARM loan has been modified or deferred to help you avoid default, however, it’s no longer eligible for assumption.

How the mortgage assumption process works

There are two distinct ways to assume a mortgage. The safest type is novation, which is when the lender agrees to let the buyer take responsibility for the existing mortgage. Because the lender puts the buyer through the underwriting process before giving its approval, it is willing to release the seller from all future responsibility for the mortgage payments.

Simple assumption is a less-common way to assume a mortgage. It’s a private transfer of responsibility for the mortgage from the seller to the buyer — without the mortgage lender’s approval. Because the mortgage lender isn’t involved and doesn’t put the buyer through the underwriting process, it’s a much riskier transaction. In practice, it means if the buyer fails to make payments or otherwise breaches the mortgage contract with the lender, both the buyer and seller are liable. Often, there are family ties or other pre-existing relationships between buyers and sellers who utilize simple assumptions.

The catch: You may need cash to cover equity

Mortgage assumption allows a buyer to take on the original loan balance at the original terms, but it doesn’t account for any home equity the seller has built. If the house has gained value since the original loan was issued, the loan may no longer cover the home’s actual value and the buyer must make up the difference.

For example, if the seller has a $300,000 loan balance on a $435,000 home, the buyer will need to bring $135,000 to the table to compensate the seller for the equity they’ve built.

Can I take out a loan to cover the equity when assuming a loan?

Yes. A home equity loan is a common second mortgage option for buyers who are assuming a mortgage and don’t want to — or can’t — put down cash to cover the equity. Although this second loan will likely have a higher interest rate than the assumed mortgage, the principal amount will be far lower than what is needed for a “first” mortgage.In some cases, you can get this funding with the help of the real estate listing site where you found the home.

How to get an assumable mortgage

STEP 1: Find homes

As assumable mortgages have gotten more popular, sites dedicated to assumable real estate listings have begun to pop up. Popular sites include Assumable.io, AssumeList.com and WithRoam.com. Even some of the big-name real estate websites, like Realtor.com, have begun to tag their listings with assumable mortgages so that they’re easier to find. However, most major sites still don’t have filters to help you zero in on these homes. In those cases, here are some strategies you may want to try:

• Use a title company. Ask a title company for title listings in the area that have government-backed loans. Since you know that most government-backed loans are assumable, this will get you a preliminary list with names and addresses. You’ll then need to reach out directly to the homeowners to gauge their interest.
• Scour MLS listings. Real estate brokers can enter comments on the properties they list with a multiple listing service (MLS), and some may mention that the home comes with an assumable mortgage.
• Target distressed properties. Homeowners who are in mortgage default may be more open to assumption, because it can help them avoid foreclosure. This route may take extra cash, as you’ll be required to bring the loan current immediately or get on a repayment plan.

STEP 2: Confirm eligibility

You’ll want to search the mortgage contract for an assumable clause. Look for language that clarifies the status of the mortgage. Even if there isn’t a specific clause that states the mortgage is assumable, it may still be. A real estate attorney can help you navigate the paperwork.

STEP 3: Provide documentation

Unless you’re assuming a mortgage privately from someone you already have a close relationship with, you’ll likely go through underwriting to transfer financial responsibility. The seller’s lender will put you through an approval process that requires documentation and information typical of a mortgage application.

STEP 4: Pay closing costs and down payment

Closing costs on assumed government-backed loans are cheaper than the 2% to 6% you’d normally pay to close a loan. Each type of government loan has its own cap on how much you can pay in fees at closing, which keeps costs low. However, you may still need to put down cash to cover equity.

STEP 5: Sign the promissory note

Once you sign the promissory note, it’s official — you’re on the hook for the mortgage payments. If the lender has agreed to the assumption, they’ll also release the seller from all obligations related to the loan.

It takes longer to close on an assumable mortgage

It usually takes between a month and 45 days to close on a traditional mortgage, but you can expect an assumable mortgage to take a little longer — around 45 to 90 days.

Assuming a mortgage after death or divorce

After a death or divorce, mortgage assumption can help families transfer assets even without the lender’s approval. You’ll get to skip the underwriting process, but you’ll still need to pay closing costs and cover any equity the previous owner built.

Pros and cons of an assumable mortgage