What Is an Assumable Mortgage?

In a world where average mortgage interest rates over 7% have become the norm, assumable mortgages are a valuable commodity for both buyers and sellers. When a buyer assumes or takes over the previous owner’s mortgage, the outstanding mortgage is transferred from the original owner to the buyer. From lower interest rates to higher property costs, there are many reasons buyers and sellers can benefit from these mortgages. Read on to understand how you could save thousands with an assumable mortgage.  

What Is an Assumable Mortgage?

An assumable mortgage is a financing arrangement in which a mortgage’s outstanding amount and terms are transferred to a homebuyer along with the property title. By assuming the debt, the buyer either avoids obtaining a mortgage entirely or can secure lower-interest financing for the assumable mortgage. Note that not all mortgages are assumable.

Federal Housing Authority (FHA), Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) loans, all of which are already known for low interest rates and favorable terms, are also, in most cases, assumable. Conventional loans backed by Fannie Mae and Freddie Mac are usually not assumable, although some adjustable-rate mortgages are assumable. 

Assumable mortgages differ from traditional ones in that the buyer doesn't have to go through the rigorous approval process with a bank or lender. Instead, the buyer takes over the seller’s existing mortgage. 

The major advantage of this is cost savings. Buyers can save on interest rates — sometimes up to a 5% annual percentage rate (APR) difference — and closing costs with a mortgage they assume. For sellers, this can be a major marketing point and with the possibility to increase the property’s asking price. 

How Does an Assumable Mortgage Work?

An assumable mortgage works by allowing potential homebuyers to assume the existing mortgage of the sellers. When a homebuyer takes out a mortgage from a lending institution or bank to finance a property, they receive a contractual agreement with the bank that outlines the repayment period, interest rate and principal payment to the lender. 

If the loan is an FHA, VA or USDA loan or an adjustable-rate mortgage (ARM), it might be assumable. In that case, if the original homeowner later decides to sell the home, they may transfer the mortgage to the new homebuyer. 

With an assumable mortgage, the homebuyer assumes the current principal balance, interest rate, repayment period and any other terms of the seller’s original mortgage contract. For new homebuyers, this saves time from the rigorous loan process. Instead, they can easily take over the mortgage.

The potential cost savings is significant. With some VA or FHA loans from years ago carrying interest rates under 3%, new home buyers could save thousands throughout the loan. For that reason, they’re usually willing to put in higher bids on the properties, allowing sellers to walk away with more cash in hand. 

These mortgages could be convenient in times of low-interest rates but don’t hold the same appeal as when interest rates are high. In times of high interest, borrowers face high-interest rates on any approved loan, even with exceptional credit scores. The most attractive, assumable mortgages are those with fixed interest rates. Locked-in low-interest rates can be extremely valuable. 

Example of How Assumable Mortgage Works

Suppose you’re considering purchasing a $250,000 property. With current mortgage interest rates, the best available rate on a conventional mortgage is 7%. If the seller has an assumable FHA loan with a 3% interest rate and $150,000 remaining in principal, you could assume that $150,000 mortgage with 3% interest. 

If 20 years remain on the mortgage, the difference in the interest you’ll pay over 20 years is nearly $80,000 ($129,374 of interest at 7% minus $49,734 of interest at 3%), or a savings of about $4,000 per year and $360 per month in mortgage payments. That difference can go a long way in reaching other savings or retirement goals. 

What do you do about the difference of $100,000 between the home price and the assumable mortgage amount in this example? You have two options. You can take a second mortgage for the remainder or make a larger down payment of $100,000.

When Is Assuming a Mortgage a Good Idea?

Assuming a mortgage becomes especially attractive when interest rates are high or the original terms are especially favorable. Here are times when seeking an assumable mortgage may make sense. 

Interest Rates Are High

Assuming a mortgage is a good idea when interests are high because you could save between 1% and 5%. For every $100,000 in mortgage value, each 1% change in interest rate equals over $23,000 extra paid over a 30-year mortgage. Over a 20-year mortgage, it’s a difference of over $14,000. 

That means if you assume a mortgage with the remaining principal of $300,000 and an interest rate of 3% less than the best available mortgage offer over 20 years, you’ll save over $126,000 — over $500 a month — in interest payments.

Original Terms Are Attractive

Assuming a mortgage is a good idea when the original terms are attractive. This often includes lower interest rates or monthly fees, reducing your monthly payments and leading to long-term savings. 

Buyer Has a Lower Credit Score

If you’re a buyer with a lower credit score, assuming a mortgage is a good idea because you won’t have to worry about the approval process of a traditional mortgage. While most lenders still need to approve buyers assuming a mortgage, terms are more lenient. In addition, if the buyer is creditworthy, the lender must approve a sale by assumption.

When Is Assuming a Mortgage Not Recommended?

While assumable mortgages are a fantastic option when interest rates are high, there are times when they don’t make sense.

Interest Rates Are Low

Assuming a mortgage is usually not a good idea when the interest rates are low because you can secure better interest rates by applying for a new loan. It’s still worth considering if you have a low credit score.

Buyer Can Qualify for Better Terms

You don’t need to assume a mortgage if you can qualify for better terms. Assuming a mortgage is not a good idea if the best offer includes lower interest rates, fees or other favorable terms.

Seller’s Financial Situation Is Uncertain

In some cases, assuming a mortgage carries risk for the buyer. If the buyer and seller make the assumption without informing the lender, the lender could demand the full loan amount repaid early if they find out. 

Likewise, if the assumed mortgage remains in the name of the seller, and you pay the seller, you risk losing the property if the seller were to default on the loan. For that reason, if you cannot assume the mortgage directly with the lender and sign the relevant transfer documentation, an assumable mortgage isn’t worth the risk. 

How to Assume a Mortgage in 4 Easy Steps

It only requires four steps if you’re ready to secure lower interest rates and long-term savings by assuming a mortgage. 

1. Determine Your Eligibility to Assume a Mortgage

Criteria for a buyer’s eligibility to assume a mortgage vary by lender. However, all lenders look at credit score, debt-to-income ratio, income and overall financial stability. 

To improve your eligibility, work to improve your credit score. Often, a credit score over 620 is enough, and over 700 is generally considered good. Also, check that your debt-to-income ratio is below 40% and ideally below 30%. If you can, work toward paying off other debts to reduce total debt before applying. 

For example, on a VA loan, the buyer must have a minimum credit score of 620 and a maximum debt-to-income ratio of 41%. According to VA requirements, you must also have enough residual income for your family size.

2. Research and Analyze the Existing Mortgage

Understanding the best available offers is important before assuming a mortgage. Review the terms and conditions of different mortgage offers and any available mortgages you are considering assuming.

The U.S. government collects and distributes a database with information about U.S. mortgages called the Home Mortgage Disclosure Act (HMDA). The HMDA dataset contains the most comprehensive publicly available information on mortgage market activity and can allow you to look at past years’ best mortgage rates and current mortgage rates to understand what you’re looking for. 

You can speak with banks and mortgage lenders about general terms and get preapproval for current mortgages to understand and evaluate the mortgage terms and potential liabilities. 

When you get that information, you’ll want to check interest rates or APR, total fees (if any) and additional terms, like early repayment penalties. This information can be used as a comparison baseline for any assumable mortgages you’re considering. 

3. Contact the Lender and Negotiate Terms

Remember that you can always negotiate. You can contact the lender and express interest. You may want to include reasons the lender should consider negotiating, such as a larger down payment or an excellent credit score.

When negotiating, focus on the favorable terms with the greatest long-term impact, such as interest rate or a flexible repayment schedule. If necessary, you should seek legal advice from a real estate lawyer to help you understand the mortgage terms and the long-term implications for your financial health. 

4. Complete the Mortgage Assumption Process

To protect your purchase, finalizing the transfer with the lender is essential. This requires significant paperwork and documentation. You will need to complete an application and meet the lender’s credit, income and financial requirements to assume the mortgage. 

You usually must submit income information, including proof of income, savings and total debt. You might be asked for past tax returns, bank statements or pay stubs. You’ll also need an official government-issued ID and your Social Security number. On approval, you’ll need to sign a mortgage assumption agreement.

In addition to proof of income and credit score, the lender will notice and question the difference between the remaining mortgage balance and the home price. If the price exceeds the remaining mortgage, you’ll have to make a downpayment for the difference and may need to take out a second mortgage to cover the difference. 

Advantages of Assumable Mortgages

These mortgages have numerous advantages, from low-interest rates to long-term cost savings. Here are four reasons to consider an assumable mortgage.

Lower Interest Rates

Especially when interest rates are high, assuming a mortgage could save you thousands in interest payments each year over the lifetime of the mortgage. Even a 1% interest rate savings is worth the mortgage assumption process.

Easier Qualification Process

While lenders still check credit scores, income and the debt-to-income ratio of buyers applying to assume a mortgage, criteria are generally more lenient. You can qualify for an assumable mortgage even with a low credit score or other negative marks on your mortgage application.

Potential Cost Savings

Assuming a mortgage could provide you with significant short-term and long-term cost savings. As the examples above show, you could save between $100 and $500 per month by assuming a mortgage. Over the lifetime of the loan, that's a difference of over $100,000 in possible savings.  

Transferable Terms and Conditions

An assumable mortgage means you could also pass it on to other buyers. That means that even if you plan to move in five years, you could pass on the benefits, like low-interest rates, to another buyer, potentially securing a higher home sale price. 

Potential Disadvantages of Assumable Mortgages

While assuming a mortgage offers many advantages, there are a few drawbacks to consider carefully. 

Limited Lender Options

With an assumable mortgage, you’re locked in with the previous homeowner’s mortgage lender. This limits your ability to shop for the best available terms. While this isn’t necessarily a disadvantage, it’s a factor to be aware of, especially if you only want to work with certain lenders. 

Higher Fees

When assuming a mortgage, be aware of potential higher fees, including mortgage insurance or additional fees, adding to your monthly costs. 

Risks if the Original Borrower Defaults

Who is responsible in case of a default depends on the assumed mortgage terms. In many cases, if either borrower defaults, the lender can pursue both the original borrower and the new homeowner for the debt. If the original borrower retains the loan and defaults, you could risk losing your home. 

But there’s also a risk to the original borrower. Many times, when a mortgage is assumed by a third party, the home seller is not relieved of the debt payment and can still be held liable for any defaults, which, among other repercussions, could negatively affect their credit rating.

Tips for Buyers and Sellers of an Assumable Mortgage

Tips for buyers considering an assumable mortgage:

• Conduct thorough research and understand current interest rates.
• Carefully read the terms and conditions.
• Hire a real estate lawyer to protect your interests if necessary.

Tips for sellers considering an assumable mortgage:

• Carefully assess the buyer’s creditworthiness. 
• Understand the potential risks involved.
• Hire a real estate lawyer to draft a contract that limits your liability if the buyer defaults.
• Consider pricing your property higher and advertising the favorable mortgage terms to earn more upfront.

Assuming a Mortgage

Assuming a mortgage, especially in times of high-interest rates, can lead to long-term financial savings. Even if you pay more for the property, you can save in the short and long term. With careful research, assuming a mortgage could help you save thousands or hundreds of thousands of dollars on interest payments. You can ask Realtors wjetjer the home has an FHA or VA loan, and you could be on your way to assuming a mortgage. To start comparison research, you can find the best mortgage refinance rates or the best current 30-year mortgage rates. 

Frequently Asked Questions