What Is An Assumable Mortgage And How Does It Work?

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Amy Fontinelle Personal Finance Expert

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Written By Amy Fontinelle Personal Finance Expert

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Amy Fontinelle Personal Finance Expert

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Personal Finance Expert Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

| Loans & Mortgages Editor

Updated: Feb 27, 2024, 6:56am

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What Is An Assumable Mortgage And How Does It Work?

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You’re finally ready to buy a home. Work is stable, you’ve saved a small fortune and you’ve found a community you want to stick around in. There’s just one major problem: Interest rates are much higher than you expected. At these rates, you can’t afford the homes that used to be in your price range.

If only you could go back in time when rates were lower but with the financial security you have now. Well, maybe you can. A little-known financing option called an assumable mortgage could make this fantasy a reality.

What Is an Assumable Mortgage?

A mortgage assumption occurs when a new borrower takes over an existing borrower’s mortgage. This means that the new borrower becomes responsible for paying off the remaining loan balance over the remaining term. Depending on the loan type and transfer circumstances, the new borrower could take on the existing mortgage rate.

If the existing loan has a lower rate than the market is currently offering, an assumable mortgage can be incredibly attractive—especially if the loan balance is high relative to the home’s value. This is because the existing balance is what has the lower assumable rate. For instance, if you’re buying a $400,000 home and current mortgage rates are 7%, you’d rather assume a large portion of the existing balance at the lower assumable rate. The more you assume at the lower rate, the less you’ll have to finance at the higher 7% rate to cover the difference between the sale price and the assumable mortgage.

The mortgage servicer must approve the transaction. If approved, the mortgage servicer will release the existing borrower’s liability and the existing borrower will transfer the property deed to the new borrower. You can find out whether a loan is assumable by reviewing the mortgage or deed of trust or by looking at your loan’s closing disclosure.

Why Use an Assumable Mortgage?

There are several situations where an assumable mortgage can be an ideal.

Interest Rates

The biggest reason to use an assumable mortgage is to get a lower interest rate than wouldn’t otherwise be possible in the current market.

For example, if you wanted to buy a home in December 2023, you would’ve faced market rates of around 7%. If you could find someone who wanted to sell their home and had mortgaged it in 2020 when rates were around 3%, you could’ve cut your monthly payment by more than half. The loan would’ve only had 26 years remaining on the term, not 30.

Death

When a mortgage borrower dies, the successor in interest (typically a spouse or children) can take over the mortgage without having to qualify for the loan. This is not technically an assumption under federal law, but it is very similar to an assumption since the successor inherits the loan’s existing rate and terms.

Divorce

A mortgage assumption can allow one spouse to take over full responsibility for the loan and release the other spouse from liability in the event of a divorce.

Default

If you’re facing foreclosure, you may be able to avoid it if you can find someone to buy your home and assume your mortgage.

What Types of Loans Are Assumable?

Government-insured mortgages—FHA, VA and USDA loans—are typically assumable. This doesn’t mean that anyone who wants to assume one of these loans will be approved. In most cases, the new borrower still has to qualify. For other mortgage types, assumability depends on the circumstances and who owns the loan.

Regardless of loan type, all assumptions require the loan servicer’s approval (and/or the guaranteeing agency’s approval). Transferring a mortgage without permission is a bad idea.

If the loan is not assumable and the servicer finds out, it can require immediate and full repayment of the outstanding loan balance (with exceptions related to death, divorce and transfers to spouses or children.)

Furthermore, even if the loan is assumable but the servicer did not approve it, the original borrower would remain liable for the loan because the servicer wouldn’t have released them from their obligation. If the new borrower is late on payments or stops paying altogether, the original borrower’s credit score is on the line—and, in mortgage recourse states, the borrower’s assets are on the line, too.

FHA Loans

You can assume an FHA mortgage if you’ll use the home as your primary residence. In limited circumstances, you could also use the home as your secondary residence. There’s no loan-to-value (LTV) ratio requirement if you’re assuming the home as your primary residence, but if it will be your second home, your LTV based on either the home’s original value or current value must be 85% or less.

The borrower will also need to meet the servicer’s underwriting qualifications to assume the mortgage. At closing, the borrower may have to pay certain fees, including:

Assuming an FHA loan can be especially attractive for loans made before June 2013. Unlike newer FHA loans, these older ones don’t require the borrower to pay mortgage insurance premiums for the life of the loan.

VA Loans

VA loans are assumable if the existing borrower is current on the loan, has entered a contract with a purchaser and the purchaser meets the VA’s borrower requirements. There are no military service requirements to assume a VA loan. However, if the existing borrower wants their entitlement restored, they may only want to let another service member buy their home and assume their loan.

The funding fee for a VA loan assumption is just 0.5%, which is lower than the usual VA funding fee of 1.25% to 3.3%.

USDA Loans

Unlike FHA and VA assumptions, USDA loan assumptions usually don’t give the new borrower the existing loan’s rate and terms. You’ll receive a new rate and term while assuming responsibility for the remaining debt, making assumable USDA loans far less attractive.

However, if the home is transferred due to death or divorce, the new owner may be able to take on the existing loan’s rate and terms. Not only that, but they will not have to qualify based on their credit or income, and if their adjusted household income is low enough, they might qualify for a subsidy that reduces the monthly payment.

Conventional Loans

If you have a conventional loan, there’s a good chance Fannie Mae or Freddie Mac owns it. Conventional fixed-rate loans are usually not assumable, however both entities allow adjustable-rate mortgages (ARMs) to be assumed. That said, assumption might only be possible after the ARM’s initial fixed-rate period ends. As for fixed-rate loans, the loan must be repaid when the borrower sells the home.