Mortgage assumption is a process in which home sellers offer potential buyers the option to take over (or assume) their remaining mortgage debt as opposed to taking out a new loan to purchase the property.

Whenever you buy a home, it’s common practice to take out a mortgage to finance your purchase. If the seller offers you a mortgage assumption, however, you’ll be able to take over their remaining debt rather than starting from scratch with your own mortgage.

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What is a mortgage assumption?

Mortgage assumption is when a borrower opts to take over, or assume, another borrower’s existing home loan instead of taking out a brand-new home loan of their own.

When a buyer assumes the seller’s mortgage, the terms attached to the loan, including the outstanding balance, the interest rate, and repayment period, often don’t change.

While an assumable mortgage isn’t the best option for every home seller or buyer, it can be beneficial in certain circumstances. For example, for a seller struggling to pull in potential buyers or a buyer who is being priced out of the market by high rates, a mortgage assumption may be a good option to save or even make some money in the long run.

How do assumable mortgages work?

One of the most important things to remember when considering an assumable mortgage is that it only applies to the remaining balance of the original loan taken out by the seller. As such, the assumable mortgage may not cover the entirety of the home’s current value.

However, the buyer will have to cover the difference through cash payments or taking out a second mortgage on the property, like a home equity loan.

In this case, the buyer must find a lender willing to qualify them for a second mortgage and ensure they can meet the combined loan-to-value (LTV) ratio guidelines for their specific loan.

If you decide that you want to move forward with an assumable mortgage, it’s important to know the difference between the two main types: simple assumption and novation.

Simple assumption

This version of mortgage assumption acts as a private transaction between the seller and the prospective buyer. The buyer assumes the title to the home and responsibility for the remaining payments on the seller’s mortgage, but the seller remains liable for outstanding mortgage debts.

In this case, if the buyer fails to make a payment or makes a payment late, the default will be reflected on the credit profiles of both the buyer and seller.

Novation

In the case of a novation-style mortgage assumption, a mortgage lender will have to get involved to ensure the complete legal transfer of rights and responsibilities from the seller to the buyer.

This option releases the home seller from all liability for the remaining balance of the mortgage. Novation is only possible, however, if the buyer meets the lender’s lending requirements.

Key Takeaway For a home seller to be released from all liability for their original loan, a lending agent will have to get involved to complete the transfer of rights and responsibilities to the buyer.

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Which kinds of loans are assumable?

If an assumable mortgage sounds like a good fit for you, you’ll be happy to know that several types of loans are assumable, including government-backed loans from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Department of Agriculture (USDA).

Conventional loans may be eligible for assumption, but only under certain circumstances.

FHA loans

Loans backed by the Federal Housing Administration (FHA) will likely be assumable so long as both buyer and seller meet the requirements for assumption. For this to happen, the property in question must be the seller’s primary residence at the time of the sale.

Buyers should verify with the FHA that the original mortgage is assumable, then apply for an individual FHA loan as they normally would. After the application is complete, the seller’s lender will verify that the buyer’s credit meets the correct qualifications before proceeding with the assumption process.

If the buyer qualifies, the assumption can take place, although the seller will remain ultimately responsible for the loan unless they are released from it.

VA loans

For veterans and their spouses who took out their mortgage loans with the Department of Veterans Affairs (VA), assumption is possible under certain circumstances.

To assume a VA loan, the buyer does not need to be a member of the military, but the lender and regional VA loan office will have to approve the buyer’s credit ahead of processing the assumption.

Most commonly, however, buyers approved to assume VA loans are military members themselves.

That being said, if the seller took out the original loan before March 1, 1988, buyers can freely assume the VA loan without the approval of the VA or the lender.

USDA loans

USDA loans are the most common assumable loans for people interested in buying properties in rural areas. This particular type of loan requires no down payment and frequently has lower interest rates than other loans.

In addition to meeting standard qualifications, such as credit and income requirements, buyers interested in assuming a USDA loan will need to receive approval from the USDA to transfer the property’s title.

If approved, the buyer can either retain the original terms and interest of the loan set up by the seller or establish new terms with the USDA.

Even if the buyer is approved by the USDA, however, the assumption cannot take place if the seller is behind on their mortgage payments.

Conventional loans

For the most part, buyers cannot assume conventional loans because of a “due-on-sale” clause included in the loan agreement. A “due-on-sale” clause gives the lender permission to clear any outstanding and payable loan balance if the loan is sold or transferred to a third party without their consent.

Under certain circumstances, however, conventional loan lenders cannot enforce this clause. These include the death of a parent who willed their home to their child or children and divorce.

Because of these exceptions, most mortgage assumptions of conventional loans happen between relatives.

Key Takeaway USDA, FHA, and VA loans are usually assumable when certain criteria are met. Conventional loans are not usually assumable.

Pros and cons of assumable mortgages

Before moving forward with a mortgage assumption, both buyers and sellers should review the pros and cons of the process:

Pros of assumable mortgages

Depending on when the seller’s loan originated, you may be able to lock in a lower-than-average interest rate for your assumed mortgage.

Closing costs on an assumed mortgage may be lower than average because standard underwriting isn’t involved.

Because the seller has already partially paid off the mortgage, your mortgage amount will likely be less than it would be if you were to take out a brand-new loan.

Cons of assumable mortgages

Because you’ll need to cover the cost of the seller’s equity, your down payment will likely be higher with a mortgage assumption than if you were to take out a brand-new mortgage.

You will need to meet certain credit and income requirements to release the seller from their liability on the loan.

Depending on the original lending body, you may have to pay a loan assumption fee in addition to your closing costs.

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How do you qualify for a mortgage assumption?

To qualify for mortgage assumption, you will likely have to meet certain credit score and income requirements. These requirements are, generally speaking, the same as those required to

take out a brand-new loan

Key Takeaway If you don’t meet the credit and income requirements for a normal loan, you likely won’t qualify for mortgage assumption.

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Is my mortgage assumable?

Several types of mortgages are assumable, including USDA, VA, and FHA loans. Each of these agencies has its own requirements for loan and mortgage assumption.

A buyer should be sure to confirm with both the seller and the seller’s lender that the loan is assumable before moving forward with the process.

Should I get an assumable mortgage?

There are pros and cons to mortgage assumption that both buyers and sellers should consider. If you’re a buyer, consider taking on an assumable mortgage when current interest rates are higher than the existing mortgage’s rates to save some money in the long run.

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