An assumable mortgage is an existing loan held by a seller that can be taken over by a new borrower. A homebuyer would simply take on the seller’s existing mortgage commitment instead of applying for a new loan to purchase the property.
Most conventional mortgages aren't assumable because they contain “due on sale” clauses that require the loan’s balance be paid off when the property transfers owners. But FHA and VA loans are assumable, and U.S. Department of Agriculture mortgages are as well. Adjustable rate mortgages (ARMs) can also be assumed as long as they're not within their fixed-rate periods.
What Is an Assumable Mortgage?
A homebuyer "assumes" responsibility and liability for a mortgage when they take over this type of mortgage. The original borrower—the seller—is replaced on the loan by this new individual, who is then responsible for paying off the loan and for meeting all of its other requirements.
An assumable mortgage is financing in lieu of taking out a new loan, the proceeds from which would pay off the first mortgage.
How Does an Assumable Mortgage Work?
As an example, let's say Joe wants to buy Mary's home. Her existing mortgage is assumable, so Joe can simply approach her lender to take over the loan.
But lenders won't simply turn over the keys to a new borrower. Joe must meet certain qualifications, and Mary's lender must approve the change. The lender will still require a credit check, a loan application, and other data before the mortgage can be assumed, but it won’t be setting any new terms or rates. It's simply determining whether the buyer can stay current on the loan if approved.
The new borrower is responsible for all monthly payments moving forward when a mortgage loan has been transferred or assumed.
Pros and Cons of Assumable Mortgages
The most significant advantage of an assumable mortgage is that you’re essentially grandfathered into an existing mortgage loan. This could open the door to homeownership if you don’t have a good chance of getting approved for your own loan.
An assumable mortgage can help if your credit wouldn’t qualify you for an attractive interest rate on a new loan. It could save you thousands over the life of the loan if the existing rate is lower than what you’d be eligible for on your own loan.
A downside to assumable mortgages is that they often won’t cover the entire home purchase. The owner has likely reduced their loan balance at least somewhat over time, so it won't be enough to cover the property’s sale price. You might need cash or a second loan to cover the difference. This is basically your “down payment."
The less equity the seller has in the home, the better. This means you’ll need to cover less of the home’s price out of pocket or with an additional loan.
How To Get an Assumable Mortgage
Sellers and their agents sometimes mention in MLS listings or advertisements that their home’s mortgage is assumable, so check listing descriptions. Look at sites like TakeList.com that offer lists of assumable homes on the market.
You or your agent can speak to the seller about their mortgage loan if there’s a home you’re particularly interested in. A quick call to the lender can confirm if the loan is assumable—and if you might be eligible to take it on.
You’ll have to meet certain income and credit-related requirements that can vary by loan type and lender, and fees will be charged as well. You must pay a funding fee of 0.5% of the assumable loan’s balance on a VA loan, and the assumption must be approved by the VA or the loan’s lender in advance.
You don't have to be a member of the military services or a veteran to assume a VA loan.
As with any mortgage process, you'll incur various costs for the processing and transfer of the loan, including:
- A VA funding fee
- An assumption fee
- Recording expenses
- Credit report pulls
- Title search and insurance
- Escrow costs
You might also have to guarantee the lender that the property will be your primary home.
- An assumable mortgage is an existing loan held by a homeowner who can transfer the loan to a buyer with the lender’s approval when they sell.
- Interest rates and all other loan terms transfer to the buyer as-is, and this can be beneficial if the assumable mortgage comes with a comparatively low interest rate.
- You must still qualify for an assumable mortgage by providing your personal financial information and undergoing a credit check.
- Most conventional mortgages are not assumable.