An assumable mortgage allows a homebuyer to take over an existing (typically government-backed) home loan from a seller, assuming the established interest rate, remaining loan term and principal balance. Think of it like a relay race — the seller passes you the mortgage baton, and you carry the loan toward the finish line.
When mortgage rates are relatively high, as they were in early 2024, assumable mortgages are especially attractive. If the seller got the mortgage when average mortgage rates were below 3%, you could take over that favorable rate and avoid paying the 6% to 7% rates you’ll find on newly originated loans.
However, assumable mortgages are generally only a fit for patient sellers with government-backed mortgages (like FHA, VA and USDA loans) — and homebuyers with deep pockets, as you’ll have to cover the seller’s equity with a down payment-like lump sum (perhaps via a second loan). There are rarer cases, such as death and divorce, in which you can assume a conventional (non-government-backed) mortgage.
How does an assumable mortgage work?
When you buy a home with an assumable mortgage, the seller’s mortgage is transferred into the buyer’s name. The basics of the mortgage — its interest rate, balance, remaining term and monthly dues — remain the same; only the name of the responsible party changes.
Example: Let’s say the seller borrowed a 30-year mortgage for $400,000 at 3.5% APR, and the loan is now three years old. Rather than getting a new loan with a rate closer to (or above) 7% and a full repayment term, you may be able to assume the current mortgage and pay 3.5% for 27 years.
Also, you assume the mortgage for the current amount owed, which is likely much less than the home’s sale price, especially with the price appreciation experienced in the past few years. However, you must pay the seller for their equity in cash or by borrowing.
“Assumable loans are exciting if you have a massive down payment, but most people don’t,” said Aaron Gordon, senior mortgage loan officer at Guild Mortgage.
Without a large down payment, you may have to take out a second mortgage to pay the seller for their equity. That presents two challenges, Gordon said:
- Getting the original loan servicer to agree for you to use a second mortgage
- Finding a lender that will provide a second mortgage, likely a piggyback mortgage
What is equity? Equity is the difference between the home’s appraised market value and the balance of any mortgages or loans secured by the property. So, if the home is valued at $500,000 and the current mortgage balance is $375,000, the homeowner has $125,000 in equity ($500,000 – $375,000 = $125,000).
In this example, you’d need to make a cash payment of $125,000 at closing to compensate the seller for their equity stake. If you plan to use a loan to cover the equity, you must have that lined up before closing on the assumed mortgage.
Which types of mortgages are assumable?
In most circ*mstances, the only loans that are assumable are those backed by government agencies, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the US Department of Agriculture (USDA).
FHA loans
To assume an FHA loan, the seller’s loan servicer will assess your credit profile and determine whether you can meet standard FHA requirements. You’ll generally need credit scores of at least 580, and the home must be your primary residence. You may be able to assume an FHA loan with scores as low as 500, provided the property has more than 10% equity.
If you plan to use a second mortgage to finance the seller’s equity, the lender will review those details during the underwriting process. Keep in mind that assuming this type of loan means you’ll be required to pay FHA mortgage insurance premiums.
VA loans
You don’t have to be a service member or veteran to assume a VA loan — however, if you wouldn’t ordinarily qualify for a VA loan, the seller must agree to give up their VA entitlement benefit, which is unlikely. For the veteran, this means they’d be unable to use their VA loan entitlement to purchase another house until the assumed loan is paid in full, refinanced or the property is sold.
The VA must approve the loan assumption, and you’ll need to meet the VA-approved lender’s credit and underwriting requirements. The VA doesn’t set a minimum credit score, but lenders can require a certain credit score, commonly 620 or higher.
In addition to paying the seller for their equity to assume a VA loan, you’ll need to pay a processing fee of about $300 and a funding fee of 0.5% of the loan balance. These fees must be paid at closing and can’t be rolled into the loan balance.
USDA loans
Unlike other assumable loans, most USDA loan transfers come with new rates and terms — you assume the seller’s outstanding debt, but the rate and loan term may be reset. Since a primary benefit of assuming a mortgage is to step into a much lower interest rate, there may not be much advantage to assuming a USDA loan. Check with your loan officer before assuming a USDA loan to determine your interest rate.
You must meet standard income and credit requirements, and both the USDA and the lender must approve the assumption.
In cases of USDA mortgage transfers between family members, the rate and term won’t change. You aren’t required to meet credit or income requirements, and the property won’t need to be appraised.
Conventional mortgage loans
In most cases, conventional mortgages aren’t assumable. Mortgages that aren’t backed by a government entity typically have “due-on-sale” clauses that require the outstanding debt to be repaid when the property is transferred to another person. To be released of liability for their current mortgage, the seller must repay the loan in full using the sale proceeds.
However, there are a few rare exceptions, such as when the owner dies and their estate transfers ownership to a spouse or family member. The due-on-sale clause may also be disregarded in cases of divorce. We’ll cover these exemptions in greater depth below.
Pros and cons of assumable mortgages
| Pros | Cons |
|---|---|
|
|
Pros and cons for the buyer
If the seller got their mortgage during the record-low rate environment of 2020 and 2021, you could snag a rate below 3%, which is impossible in today’s mortgage market. With a lower interest rate, you’ll save thousands of dollars in interest over the life of the loan.
In many cases, the closing costs on an assumed mortgage are lower than they’d be on a conventional loan — an appraisal is typically not required, and the FHA, VA and USDA place caps on some fees for assumed loans.
However, limiting your home search to properties with assumable mortgages significantly restricts your options. Plus, you’ll have to provide cash upfront (in the form of a down payment or second mortgage) to cover the seller’s equity — if the seller has a significant stake in the property, covering this amount could be unrealistic.
Since you’re not taking out a new loan, you must use the same lender that currently holds the mortgage. While this might be worth it for the chance to secure a great rate, you’ll miss the opportunity to compare the best mortgage lenders and find the right one for your unique needs.
Pros and cons for the seller
If you have an assumable mortgage and a desirable interest rate, you may attract more buyers and be able to demand a higher sales price. However, in the case of VA loans, you may lose your VA full entitlement, unless you sell to another veteran. This means you couldn’t use your full VA loan benefit to buy another home until the assumed loan is paid in full (including via refinancing or sale).
How to assume a mortgage
Assuming a mortgage has to begin with the seller because it’s “up to the loan servicer as to how it all goes down,” Gordon said. Before putting the home on the market, sellers must contact their loan servicer, confirm that the loan is assumable and ask for a loan assumption package. The seller should also confirm whether the servicer will allow a buyer to take out a second mortgage.
From the buyer’s perspective, here are the steps you’ll follow to assume a mortgage:
1. Plan for costs
Unless you can get a second mortgage, you’ll need a large sum of cash upfront to cover the equity and closing costs.
Example: If you want to buy a home listed for $300,000 and the current mortgage balance is $200,000, the seller has $100,000 in equity. You’ll need to pay that amount at closing. You’ll also be responsible for closing costs, which could be as much as 2% to 6% of the loan amount, or another $4,000 to $12,000 on a $200,000 mortgage. In this scenario, you’d need between $104,000 and $112,000 at closing.
Given that the median balance of savings accounts among Americans was only $8,000 in 2022, according to Federal Reserve data, most homebuyers won’t have sufficient savings to fork over at closing. Even if you plan to use a second mortgage to pay for the home’s equity, it’s smart to save money before buying a home.
2. Find a home with an assumable mortgage
Your real estate agent can help you consult Multiple Service Listings (MLS) to find homes with assumable mortgages. The agent can even see a mortgage’s origination year, so you can estimate the loan’s interest rate, Gordon said. You can also check online listing services like Zillow and include keywords like “assume” or “assumable” to find sellers promoting an assumable loan.
3. Confirm that the loan is assumable
Although the seller should have confirmed that the loan is assumable before putting the home on the market, it’s always a good idea to confirm this detail yourself. Contact the seller’s mortgage servicer to confirm that they’ll allow assumption and ask whether they’ll permit a second mortgage on the property.
4. Gather financial documentation
You’ll need to provide the same information you’d supply with any mortgage application, including:
- Proof of income, such as pay stubs for the past 60 days
- Bank and investment account statements showing your assets
- Tax returns for the previous two years
- A government-issued ID
5. Submit an application
The application will be the same as with a traditional mortgage, although the approval process may take longer. Loan servicers have seen a spike in assumption applications and may not have the staff to handle them quickly, Gordon said.
VA policy states that the servicer must notify the buyer and seller of its approval or disapproval within 45 days of receiving the underwriting package.
6. Proceed to closing
At closing, you’ll provide the funds to cover the seller’s equity and closing costs, or you’ll present documentation related to your second mortgage. You may have to sign a release of liability to confirm that the seller isn’t responsible for the mortgage, especially in the case of VA loans. Otherwise, the closing process will be similar to closing any other mortgage.
Assuming a mortgage in special circ*mstances: death or divorce
While a conventional mortgage is not normally assumable, the loan may be assumed in cases of death or divorce.
| Death of a spouse or relative | Divorce or separation |
|---|---|
You can be added to the mortgage without meeting the ability-to-pay rule, a 2014 law that says a borrower must be able to afford the payments before they can be issued a mortgage. When you inherit a home, the lender doesn’t have to confirm whether you can repay the loan. | One spouse can choose to remain in the property and assume the liability for paying the mortgage. As long as the property is transferred in a divorce decree, legal separation agreement or property settlement agreement, the lender can’t enforce the due-on-sale clause. However, you may have to demonstrate that you can afford the loan independently and meet other underwriting requirements. |
Is an assumable mortgage right for you?
An assumable mortgage works best when there’s “a willing, patient seller” and a buyer with a large down payment, Gordon said. Sellers need to be willing to go through the time and trouble of the loan assumption process — they may decide to put in the effort if it means they can get top dollar for their home without offering any concessions to the buyer.
As a buyer, you may be able to assume a loan with a very low mortgage rate if you have the cash to cover the seller’s equity or qualify for a second mortgage. However, you may find that a property with a low-rate assumable mortgage has multiple potential borrowers waiting in the wings, even in a buyer’s market.
“It’s definitely worth exploring, but you need to understand that it’s not that easy to execute,” Gordon said.
Frequently asked questions (FAQs)
Your loan contract will include an assumption clause if the loan is assumable. If, instead, you find a due-on-sale clause, your mortgage is not assumable (except for certain conditions like death or divorce). Even if your mortgage has an assumption clause, your lender must approve the assumption, and the buyer must meet lender requirements for credit score and income.
You may be able to assume a mortgage with a much lower interest rate than is currently available. However, whether an assumed mortgage is cost-effective will depend, in part, on the amount of the seller’s equity. If you need to take out a second mortgage for a substantial portion of the mortgage amount, you may not have much opportunity to save on interest — especially because piggyback mortgages tend to have higher-than-average interest rates.
Yes, you can refinance an assumable mortgage, but if you refinance in the current mortgage environment, you’ll lose the mortgage rate that makes assuming a loan attractive.
You must meet requirements concerning your credit scores, income and debt-to-income ratio. The specific requirements will vary by lender and the type of mortgage being assumed.
