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An assumable mortgage allows a home buyer to not just move into the seller's former house, but to step into the seller's loan, too. This means that the remaining balance, repayment schedule and rate will be taken over by the new owner.
When mortgage rates are high, assumable mortgages can be particularly attractive to buyers, who could stand to save thousands by taking over a home loan at an interest rate below what’s currently on offer. Picture a home purchased in November 2016, when rates hovered around 4%. Someone buying that home with an assumable mortgage in November 2022 could save about 3 percentage points on their rate.
Only government-backed mortgages, such as loans backed by the Federal Housing Administration and Department of Agriculture, can qualify as assumable mortgages. However, in addition to taking on the home’s remaining debt, the buyer will likely have to pay off the difference between the mortgage balance and the home’s current value. This could necessitate a second mortgage.
Here’s how assumable mortgages work, and the advantages and disadvantages for buyers and sellers.
What is an assumable mortgage?
An assumable mortgage is a home loan that can be transferred from the original borrower to the next homeowner. The interest rate and payment period stay the same. For example, if a 30-year mortgage is three years old, the person assuming the loan has 27 years to pay it off. Essentially, only the name on the mortgage documentation changes; everything else remains the same.
Which mortgages are assumable?
Not all mortgages are assumable in a home sale. Buyers can assume federally guaranteed or insured mortgages, but not other types of home loans. Conventional loans cannot be assumable, but buyers can assume:
How to assume a mortgage
Assuming a mortgage requires the lender's approval. If a buyer and seller enter into an assumption informally, without telling the lender, they take a risk. After the lender finds out, it can demand payment of the full loan amount immediately. And if the loan stays in the seller's name, the seller remains responsible for the debt.
In a properly done assumption, the new borrower must jump through some of the same hoops it would take to qualify for a new loan. The loan's servicer requests the borrower's credit report, plus financial and employment information. Finally, the lender releases the original borrower's liability for the debt.
If the buyer is assuming a $200,000 mortgage balance on a home that’s now worth $450,000, they’ll have to work out with the seller how and when they’re going to pay that $250,000 difference. The seller could demand the money upfront.
You can find an assumable mortgage by including “assumable” as a keyword when searching available listings to see if any of them are offering this as a selling feature. You could also search pre-foreclosure listings and reach out to the owners to see if they’d be open to selling the home with an assumable mortgage as an alternative to foreclosure.
The transaction could be completed among you, the seller and the lender, but you may find it helpful to use an agent to negotiate the details, like the closing date and the terms for paying the difference between the home’s value and the mortgage balance.
Advantages of assumable loans for sellers
Easier sale: An assumable loan can make the home more marketable if interest rates have risen in the years since the mortgage was originated. Imagine a situation in which someone gets an assumable mortgage with a 4.75% interest rate and then sells the house five years later when interest rates are around 7%. That 4.75% rate, impossible to get otherwise, could tempt buyers to choose that house over another.
Higher price: Another advantage is that an assumable mortgage endows the seller with negotiating power on price. Since the buyer is taking on a lower rate for the principal balance than what they’d get on a new loan (and since assumable mortgages have lower closing costs), borrowers will be able to apply these savings to their second mortgage. In turn, the seller can command a higher sale price.
Advantages of assumable loans for buyers
Lower interest rate: This is the biggest advantage of an assumable mortgage since it allows the buyer to access a rate that could otherwise be unachievable in the current market.
Lower closing costs: Because it costs less to assume a loan than to get a new mortgage and the FHA, VA and USDA impose limits on assumption-related fees, assumable mortgages have more affordable closing costs.
Disadvantages of assumable loans for sellers
VA entitlement: Sellers who have VA loans can hit a snag when buyers assume their mortgages.
With a VA loan, the government guarantees that it will repay part of the balance if the borrower defaults. The VA, which limits this guarantee, calls its dollar amount the borrower's "entitlement." Depending on the loan amount, some or all of the borrower's entitlement remains tied up in the home with the assumed mortgage, even after the sale.
Because the entitlement remains with the assumed loan, the seller might not have enough entitlement remaining to qualify for another VA loan to buy the next home.
A seller can avoid this predicament by selling to a veteran or member of the military who is eligible for a VA loan. The buyer can then substitute their entitlement for the seller's. In such a case, the VA restores the seller's full entitlement.
Disadvantages of assumable loans for buyers
Large down payment: Rising home values can torpedo mortgage assumptions. To understand why, remember that when a buyer assumes a mortgage, it's like stepping into the seller's mortgage, which may no longer cover the cost of the house.
Let's say a seller, after paying the mortgage for five years, owes $150,000 on it. The buyer would assume that amount. But the home's value has risen to $215,000 in the five years that the seller has owned it. The buyer will have to pay the difference. In most cases, that means getting a second mortgage, which carries both closing costs and a higher rate, further undermining the assumable loan's advantage.
» MORE: What is a second mortgage?
FHA stipulations: FHA loans have certain criteria that the new owner has to meet when they assume the mortgage, including income and credit requirements.
Mortgage insurance: FHA loans can also present a drawback because their monthly mortgage insurance payments last for the life of the loan and can be eliminated only by refinancing the loan. Those monthly payments negate some of the benefits of assuming the loan's lower interest rate.
» MORE: FHA loan requirements
Assuming a mortgage after divorce or death
Not all mortgage assumptions arise from home sales. Sometimes one spouse assumes the loan following a divorce or the death of the other spouse.
In these cases, the person who assumes the loan must prove the ability to make the monthly payments. Approval isn't automatic.
If the original loan note has both spouses on it, then the lender likely took both of their credit scores and incomes into account when they qualified for the mortgage. When one spouse is no longer on the loan, then the lender will want to confirm that the remaining borrower is also qualified on their own.