To assume a mortgage, your lender has to give you the green light. That means meeting the same requirements that you'd need to meet for a typical mortgage, such as having a good enough credit score and a low debt-to-income (DTI) ratio.
More than 11 million homeowners in America have assumable loans, according to the U.S. News & World Report. And over the past 10 years, nationally, 17.1% of mortgages were FHA loans and 7.7% were VA loans, adding up to roughly 25% of mortgages that are, in theory, assumable, according to Realtor.com® data.
An assumable mortgage can be a major selling point for a home, especially if it has a very low interest rate. However, selling a home with an assumable loan can be a lengthy and complex process. Sellers should work with a real estate attorney to ensure they are not held liable for the loan after it is assumed.
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.
The catch: You may need cash to cover equity
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.
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.
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.
FHA Loan Assumption Requirements
Buyers wishing to assume an FHA mortgage must have a minimum credit score of 620, although buyers with scores above 580 may be eligible with additional restrictions.
Advantages of Assumable Mortgages
There are also fewer closing costs associated with assuming a mortgage. This can save money for the seller as well as the buyer. If the buyer is gaining a lower interest rate, the seller may find it easier to negotiate a price closer to the fair market asking price.
"Twenty percent to 25% of the homes on the market will be fully assumable at one time," says Raunaq Singh, Roam founder and CEO. But, "the number of assumption transactions that are happening is far fewer than the number of mortgages which can be assumed."
Sellers use assumable mortgages as promotional tools to attract buyers to their homes. They can also streamline the home sale process. The main difference between an assumable mortgage and a traditional one is that the buyer does not need to apply for the mortgage to take it on.
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.
If you're wondering whether your mortgage is assumable, it's a good idea to ask your lender. Your lender may also be able to tell you if there are any restrictions on transferring the loan or what would happen if the loan wasn't transferable.
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.
An assumption of mortgage after divorce can be complex to navigate, but it's a viable option for many couples looking to divide their assets and responsibilities. This process allows one spouse to take over the mortgage, effectively removing the other from liability.
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.
In 2023, 3,825 FHA loans were assumed, compared with 2,221 in 2022. In just the first five months of 2024, an additional 3,477 FHA assumable loans were recorded, putting borrowers on track to more than double last year's total. VA loan assumptions recorded an even steeper spike, from 308 in 2022 to 2,244 in 2023.
FHA Assumable Mortgage Requirements
To be approved for an FHA mortgage assumption, the buyer must meet the following requirements: Your credit score must be at least 580 to make a 3.5% down payment or between 500 and 579 to make a 10% down payment. Your debt-to-income (DTI) ratio must be 43% or less.
Increased financial risk: Sellers often face additional risks involved with assumable mortgages. For example, if a buyer takes over a freely assumable mortgage and transfers ownership to an undisclosed third party, sellers may be responsible for covering any mortgage payments that the new owner misses.
Qualified Assumptions (QA)
This option allows you to release existing borrowers from an existing loan while maintaining the same terms and conditions. QA is a loan approval process similar in nature to refinancing, and involves income and credit qualifying. NOTE: Not all loan programs are assumable.
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.
Assumptions and Their Disadvantages
Assumptions, when left unexamined, can pave the way for a multitude of disadvantages. They create blind spots in decision-making, clouding our judgment and leading us down paths that may not align with our goals.
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.
VA loans and USDA don't require any down payment and you can get an FHA loan for as little as 3.5% down. But you'll need to make a much larger down payment — at least 15%, according to Tozer — when assuming one of these loans. The reason is, an assumable loan rarely covers the full purchase price of the house.