What Is an Assumable Mortgage?
A house with an assumable mortgage can be a good buy.
An assumable mortgage is an existing mortgage loan that can be taken over by a new borrower.
Here’s how it works: Instead of applying for a new loan to purchase a property, a homebuyer simply takes on the seller’s existing mortgage. The lender on that loan will require a credit pull, loan application, and other data from the buyer before the mortgage can be assumed, but they won’t be setting any new terms or rates based on these items. They’re simply looking to ensure the buyer can make the assumed payment and stay current on the loan.
Once a mortgage loan has been transferred, the new borrower is responsible for all monthly payments moving forward.
Where to Find Assumable Mortgages
All mortgage loans insured by the Federal Housing Administration (FHA) are assumable, as are those backed by the Department of Veteran Affairs (VA). Adjustable Rate Mortgages (ARM) may also be assumed, as long as they are not within their fixed-rate periods. Most other conventional mortgages cannot be assumed, because they contain “due on sale” clauses, which require the loan’s balance be paid off when the property transfers owners.
In some cases, sellers (and their agents) may market that their home’s mortgage is assumable, so check listing descriptions and look to sites like TakeList.com and Open Listings, which offer lists of assumable homes on the market. If there’s a home you’re particularly interested in, you or your agent may speak to the seller about their current mortgage loan. A quick call to the lender can confirm if the loan is assumable—and if you might be eligible to take it on.
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. If you don’t have a high chance of getting approved for your own loan, that could open the door to homeownership entirely. If your credit wouldn’t qualify you for an attractive interest rate, assumable mortgages can help there, too. As long as the rate is lower than what you’d be eligible for on your own, it could save you thousands over the life of the loan.
One downside to assumable mortgages is that they often won’t cover the full home purchase. Because the owner has likely reduced their loan balance significantly over time, the loan is not enough to cover the property’s sale price. This means you’ll need to use cash or secure a second loan to cover the difference. (This is basically your “down payment,” so to speak.)
May give you a lower interest rate
May offer more favorable terms
Fewer closing costs
Can serve as a marketing tool for sellers
May require a second loan or significant cash payment
You must meet certain credit and income requirements
Transferring a VA loan can prevent veterans and military members from using a VA loan to purchase future properties
Getting Approved for an Assumable Mortgage
Though FHA, VA, and some ARM loans can be assumed, not every buyer is eligible. To assume an existing mortgage loan, you’ll need to meet certain income and credit-related requirements, which vary by loan type and lender.
With VA loans, for example, you must pay a funding fee of 0.5% of the assumable loan’s balance, and the assumption will need to be approved by the VA or the loan’s lender in advance. You do not need to be a member of the military services or a veteran in order to assume a VA loan.
Should You Assume a Mortgage?
Before you assume a mortgage, it’s important to consider the interest rate and terms on the loan you’ll be assuming. Is the rate lower than current market rates? (Check FreddieMac for recent rates). Is it lower than you could presumably qualify for on your own? You can reach out to a few mortgage lenders for quotes to gauge this.
You should also take fees into account. As with any mortgage process, you will incur various fees for the processing and transfer of the loan. These can include:
- A VA funding fee
- An assumption fee
- Recording expenses
- Credit report pulls
- Title search and insurance
- Escrow costs
The less equity the seller has in the home, the better, as this means you’ll need to cover less of the home’s price out of pocket (or with an additional loan).