The mortgage balance, interest rate, and repayment schedule all carry over to the buyer. However, only Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans can qualify. Conventional mortgages cannot be assumed.
Buyer can't assume a conventional mortgage, in most cases: The only types of assumable mortgages are FHA loans, VA loans and USDA loans.
A disadvantage is when the home's purchase price exceeds the mortgage balance by a significant amount, requiring you to obtain a new mortgage. Depending on your credit profile and current rates, the interest rate may be considerably higher than the assumed loan.
An assumable mortgage allows the buyer to purchase a home by taking over the seller's mortgage loan. Some buyers prefer to purchase a home with an assumable mortgage because it may allow them to take advantage of a lower interest rate.
You'll typically only be able to transfer your mortgage if your mortgage is assumable, and most conventional loans aren't. Some exceptions, such as the death of a borrower, may allow for the assumption of a conventional loan. If you don't have an assumable mortgage, refinancing may be a possible option to pursue.
Not all mortgages are assumable, but you can tell if you have one by the language in your note and mortgage. You can also find out by speaking to one of our assumption specialists at 1-800-340-0570. If you have an existing assumable mortgage, you may be able to add or remove borrower(s) through an assumption loan.
You Pay the Seller Instead of Making a Down Payment
When you assume a loan, you do not have to make a down payment. Instead, you pay the seller compensation for the equity they have built in the home, or the difference between their mortgage balance and what the home is worth.
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.
You'll have to pay closing costs on a loan assumption, which are typically 2-5% of the loan amount. But some of those may be capped. And you're unlikely to need a new appraisal. So you may pay less on closing than a 'typical' home purchase — but only a bit less.
The states with the highest share of assumable mortgages are Alaska (39.3%), Wyoming (34.4%), Virginia (34.1%), Nevada (32.8%), Oklahoma (32.5%), Maryland (32.1%), Georgia (31.5%), Louisiana (31.5%), New Mexico (31.4%), and Delaware (30.8%).
Typically, removing a name from a mortgage could require you to pay off the loan in full or refinance it with a new loan. But, there are alternatives where you can take over the loan without paying off it off or refinancing. These could include mortgage assumption, loan modification and bankruptcy.
A mortgage that can be transferred to a new owner without the need to refinance means that if something happens in the future, such as an increase in interest rates or other factors affecting affordability, there are no problems with transferring the mortgage over to another person who can continue paying it on time ...
Most mortgages, including conventional conforming loans and jumbo loans, aren't assumable. Some conventional loans have assumption clauses for exceptional circumstances, such as the death of a spouse – but that doesn't apply to homebuyers who are seeking an assumable mortgage.
Only government-backed mortgages, from the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture, are assumable. Conventional mortgages typically have to be paid off when the house is sold.
You'll be asked to provide extensive documentation, much like you would when securing financing the traditional way. That's why it's important to have copies of pay stubs and W-2's ready ahead of time. Keep in mind that the average loan assumption takes anywhere from 45-90 days to complete.
The Drawbacks of Mortgage Assumption
In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties' credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.
Mortgage assumption is a process whereby a new borrower takes over the existing mortgage of another person, typically a family member.
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.
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.
The elevated interest rate environment has brought an old product, the assumable mortgage, back into fashion. But a landscape of strict regulations, product limitations and operational inefficiencies hamper its widespread adoption.
Applying for a loan assumption is similar to the process of applying for a new mortgage. You will need to complete an application, provide documents, meet our credit, income, and financial requirements, and pay closing costs to get your loan assumption approved. Learn more about mortgage applications.
Needs to be a government backed loan to be assumable. FHA, USDA, or VA are all assumable by default. Conventional mortgages are generally not assumable, but if you want to read your mortgage contract maybe yours is, but not likely.
For example, if you are purchasing a home for $200,000 and the seller has a $100,000 assumable mortgage, you will still have to obtain a mortgage for the balance or pay the difference in cash. Assumption clauses generally include a fee to transfer the mortgage from one borrower to another.
Advantages of Assumable Mortgages
If the assumable interest rate is lower than current market rates, the buyer saves money directly. There are also fewer closing costs associated with assuming a mortgage. This can save money for the seller as well as the buyer.