The Assumable Mortgage: How It Works and Is It Right for You?

In a standard home purchase scenario, prospective homebuyers apply with a lender to obtain conventional financing to buy the new home on their wishlist.

Did you know that there may be another financing option that could possibly benefit both you and the seller under the right circumstances? We’re talking about the assumable mortgage.

What Is an Assumable Mortgage?

An assumable mortgage is a special type of home financing that allows a homebuyer to take over — or assume — the seller’s existing mortgage and all of the terms that come with it, such as:

• The interest rate
• Current balance
• Repayment period

In cases where interest rates have gone up significantly since the seller initially bought and financed the home, this can present a savings opportunity that includes the low interest rate on the mortgage as part of the home purchase.

However, it's important to note that the buyer typically needs to pay the seller for any equity that has built up in the home. Equity is the difference between the home's current value and the remaining mortgage balance. This is usually done in cash or through additional financing.

Which Types of Mortgages Are Assumable?

The loans that most often qualify for assumption are VA and FHA loans, which are backed by the federal government.

FHA Loans

Federal Housing Administration (FHA) loans qualify for assumption because they’re free from the restrictions of due-on-sale clauses that are common in conventional mortgages. The due-on-sale clause requires the full balance of the loan to be paid upon transfer of property ownership.

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. Similar to a conventional loan, your debt-to-income ratio, including the assumed loan’s payment, cannot exceed 43% (although in special circumstances, it can go as high as 50%).

VA Loans

The United States Department of Veterans Affairs (VA) has long offered one of the best home loan programs available for qualifying veterans, active military and their dependents. VA loans often qualify for mortgage assumptions.

VA Loan Assumption Requirements

To qualify for a VA mortgage assumption, keep the following in mind:

• You must meet all VA standards for creditworthiness and income, and the assumption must be approved by both the VA and the lender
• All mortgage obligations are assumed by the buyer, up to and including the obligation to repay the VA should you default on the loan
• You will be responsible for paying a “VA funding fee” equal to 0.5% of the current loan balance (only the principal amount)
• If you’re a buyer considering secondary financing, it’s important to note that the VA requires the second mortgage to also be assumable. And while it may be possible to obtain an assumable second mortgage through a private party, this type of loan is not readily available in the broader mortgage market.

Conventional Mortgages and Assumable Mortgages

Under certain circumstances, conventional mortgages can also be assumable, but most of those loans contain a due-on-sale clause, making the loan ineligible for assumption.

How Does an Assumable Mortgage Work?

Wondering if an assumable mortgage could be right for you? Let’s break down the steps of how this loan option works to help you make an informed decision.

Step 1: Find a Home With an Assumable Mortgage

Look for properties that have a seller who is willing to transfer their existing mortgage to you. FHA and VA loans are often assumable, while conventional loans may or may not be.

Step 2: Examine the Mortgage Terms

Carefully review the existing loan terms, including the interest rate, monthly payment and remaining loan term. Compare these terms to current market rates to see if assuming the mortgage offers a financial advantage.

Step 3: Determine the Cash Required

Calculate the difference between the home's appraised value and the remaining mortgage balance. This is the amount you'll need to pay in cash to the seller, which you can settle during the loan assumption transaction, similar to a down payment.

Step 4: Explore Financing Options

If you cannot produce the entire cash amount to assume the loan, you may be able to secure an additional personal loan to cover a portion of the difference. Keep in mind, however, that in most cases, lenders who provide secondary financing will typically want to make sure that no more than 85 to 90% of the total appraised value of the home is being financed.

Step 5: Apply for Mortgage Assumption

Work with the seller and their lender to complete the mortgage assumption application. You'll need to provide financial documentation and meet the lender's credit and income requirements.

Step 6: Obtain Lender Approval

The lender will review your application and assess your eligibility to assume the mortgage. Expect to provide all the standard financial information generally required from a lender for a home loan application. This can include pay stubs, bank statements, W2s and other documents to prove your ability to take over the mortgage.

Step 7: Appraisal and Title Verification

While an appraisal isn’t always required for an assumable mortgage, requesting one can help ensure the asking price reflects current market value. Also, conducting a title check is essential to confirm that no outstanding liens or encumbrances are on the property, providing peace of mind before finalizing the transaction.

Step 8: Finalize the Purchase

Once approved, you'll finalize the purchase by paying the seller the required cash and signing the necessary documents to assume the mortgage.

Assumable Mortgage Advantages, Disadvantages and Factors to Consider

When considering an assumable mortgage, you'll want to weigh the advantages and potential drawbacks of this type of loan, as well as other important factors.

Advantages

Savings

In the right circumstances, you could save tens of thousands of dollars on an assumed mortgage since you’re effectively grandfathered in on what could be more favorable terms secured when the original loan was obtained.

You Could Potentially Afford a Higher Priced Home

The money saved from an assumable mortgage may allow you to afford a more expensive home.

Lower Closing Costs

Closing costs for an assumable mortgage are typically lower than other types of home loans.

Disadvantages

Limited Availability

Not all mortgages are assumable. If you have your heart set on an assumable mortgage, finding a suitable property with an assumable loan can be challenging.

Upfront Cost

Buyers must typically cover the seller's equity — the difference between the home's purchase price and the remaining loan balance — either in cash or through additional financing.

Closing Costs And Other Fees May Be Charged

While closing costs can be lower with an assumed mortgage, you still need to budget for these costs and other fees.

• A lender may charge an assumption fee
• FHA closing costs are typically between 2 and 6% of the home’s sale price
• The VA charges a funding fee of 0.5% of the principal loan balance

If you’re assuming the loan of an inherited property, it may be within your rights to avoid an assumption fee. Be sure to consult with an estate attorney if questions arise.

Other Considerations

Mortgage Payments Must Be Current

No matter the loan type, all mortgage payments must be current at the time of closing. You should plan to provide funds necessary to clear any outstanding payments before you can assume the loan. The buyer or seller can bring the loan to good standing.

Lender Has Final Say

Even if the homebuyer and seller agree on an assumable mortgage, the lender ultimately has the final authority to decide whether the buyer can assume the seller’s current mortgage.

Home Equity Matters

The seller's equity plays a significant role in determining whether assuming a loan is a practical option for a buyer. Since the buyer typically needs to cover this amount upfront — either in cash or through additional financing — it can greatly influence affordability and the overall viability of the loan assumption.

You May Need to Coordinate Lenders

If you end up borrowing from more than one lender to complete the mortgage assumption, be sure that each lender is informed of all loan activity for the home. Each lender may require slightly different information, so prepare for varying requests during the financial evaluation process.

Who Benefits from Assumable Mortgages

Both buyers and sellers can benefit from an assumable mortgage.

As detailed before, homebuyers gain the opportunity to take over the seller’s existing loan, potentially securing a lower interest rate than what is currently available in the market. This can lead to significant long-term savings.

But sellers also reap advantages. An assumable mortgage can:

Make your property more attractive to potential buyers. An assumable mortgage provides a competitive edge in a slower market. This type of mortgage can be particularly appealing if the seller's loan terms are more favorable than the current lending environment.

Justify a higher asking price. Understanding that a buyer could save money with an assumable mortgage might give you leverage to justify setting a higher asking price for your home.

Overall, assumable mortgages can be a win-win, creating a smoother transaction process for both parties.

Qualifying for an Assumable Mortgage Loan

Qualifying for an assumable mortgage loan involves meeting the lender’s eligibility requirements to take over the seller’s existing loan. This typically includes a review of your creditworthiness and income stability to ensure you can manage the payments.

While the process can be simpler than applying for a new mortgage, it still requires financial documentation and approval, with specific details varying by lender and loan type.

The Cost of Assuming a Mortgage

The cost of an assumable mortgage can vary depending on several factors, such as:

Down payment or equity buyout. A homebuyer must typically cover the difference between the seller's loan balance and the home's purchase price, which can be a significant upfront cost.

Assumption fee. Lenders may charge a fee for processing the mortgage assumption.

Closing costs. Although typically lower than with a new loan, there may still be costs associated with title checks, transfer fees and other administrative expenses.

Appraisal. While sometimes optional, an appraisal could be required or requested. In this case, the buyer would likely need to pay for it.

Saving Money With an Assumable Mortgage

Here’s a sample assumable mortgage scenario and how it might help you save money.

Let’s say you’re buying a home and you’d like to assume the mortgage on the home, appraised at $230,769 with a current remaining principal loan balance of $203,249. This means you would take over the payments on the remaining $203,249 and enjoy the original terms allotted to the assumed mortgage.

That still leaves $27,520 that must be paid in cash to the seller, which you can settle during the loan assumption transaction, much like a traditional down payment. If you cannot produce that entire cash amount to assume the loan, you may be able to secure an additional personal loan to cover a portion of the difference. Keep in mind, however, that in most cases, lenders who provide secondary financing will typically want to make sure that no more than 85 to 90% of the total appraised value of the home is being financed.

Here’s an example comparison of a standard new FHA mortgage on a home selling for $230,769 versus an assumed FHA mortgage on the same home, with a lower fixed interest rate and five years already paid on the term.

New FHA mortgage: A new 30-year FHA loan for a home priced and appraised at $230,769, with a principal loan balance of $222,692 (after the buyer put a minimum of 3.5% down, or approximately $8,077) with a fixed interest rate of 6.25%, will result in monthly payments of $1,371.15 (principal and interest only, excluding property taxes and insurance) totaling $493,615.06 over the life of the mortgage.

Assumable mortgage: The assumption of a 30-year FHA loan with 25 years left on the term for a home selling for $230,769 with a remaining principal balance of $203,249 at the original interest rate of 2.5% results in a monthly payment of $911.81 and an approximate total loan cost of $273,543.07 (paid over 25 years).

Note: The example above does not include mortgage insurance. Mortgage Insurance (MI) may change depending on the LTV. Ask your loan officer for more information.

As illustrated above, if you’re able to assume an eligible loan with an interest rate significantly lower than what is available on the market and have the ability to put down the additional cash to cover the equity owned by the seller (or obtain secondary financing), your savings could be substantial.

In the example scenario, your monthly mortgage payments for the 25 years remaining on the assumed loan would be $911.81. Compared to a new FHA loan with a higher market rate, this would result in a monthly savings of $459.34, or $220,071.99 saved over the entire life of your mortgage.

It is also worth noting that the less equity a seller has in their home, the more attractive an assumable mortgage may be to a buyer. For example, if that same assumable loan had an unpaid principal balance of $215,000, you’d only be responsible for a $15,769 difference instead of $27,520.

Special Circumstances for Assuming a Mortgage

There are several special circumstances in which a buyer or inheritor must assume a mortgage in order to take possession of a home.

Assuming the Mortgage of an Inherited Home

In the unfortunate circumstance of a loved one passing, assuming the mortgage of the home that’s been willed to you would be useful if you wish to keep it in the family or live in it.

Federal law requires lenders to allow heirs to assume the mortgage of an inherited home, regardless of any due-on-sale clause included on the loan. It’s best to seek the advice of an estate attorney to ensure all bases are covered under these circumstances. As you figure out your options, be sure to continue making the regular monthly payments on the mortgage to prevent foreclosure of the property.

Assuming the Mortgage in Case of a Divorce

In the event of a divorce, one party or the other may have been awarded the family home.

If you’re the one keeping the home with a mortgage, you may or may not need to qualify based on your credit score and income — requirements can vary by investor. Check with your loan’s servicer to learn what’s needed for your scenario.

Once the awarded party assumes the mortgage, the person who will no longer reside in the home should be released from all liability with the proper signed paperwork, as required by the lender.

Assuming the Mortgage of a Home in Foreclosure

Facing foreclosure is difficult, and a homeowner may want to do anything to prevent it. Allowing another party to assume the mortgage may be a good option.

In this type of purchase scenario, you, as the buyer, will need to pay off the entire past due amount before the assumption can occur. You may accomplish this with cash or through a separate loan.

If it’s a Fannie Mae loan in question, Fannie Mae will review your financial packet to determine if you can afford the payments on the mortgage. Each investor or insurer will have specific requirements around what is required to complete the assumption.

If you’re set on the property as your ideal home, the default amount isn’t unreasonable, and the interest rate you’re assuming is favorable, then it can be worth the extra cost and effort to secure the loan.

Important Considerations For Sellers

If you're planning to sell your home and offer an assumable mortgage, here are some important things to keep in mind.

Not All Mortgages Are Assumable

Not all mortgages are assumable, so check with your lender to see if yours qualifies. FHA and VA loans are generally assumable, while conventional loans may or may not be, depending on the specific terms.

Be Sure to Protect Your VA Entitlement

If you have a VA loan and want to offer a VA loan assumption, your VA entitlement remains intact as long as the buyer is VA-eligible. If a buyer who is not VA-eligible assumes your VA loan, you would lose your VA entitlement, as it would be tied to that original loan.

Is a Mortgage Assumption the Right Move?

An assumable mortgage could be a smart move when the existing loan's interest rate is lower than current market rates, the seller's equity is manageable and the lender approves the assumption. If you're considering purchasing a home with an FHA or VA mortgage, ask the seller if their loan might be assumable and connect with their lender to explore the possibility.

Questions about your existing mortgage or looking to buy a home soon? We’re here for you. Connect with a Pennymac Loan Expert to explore your home loan options today.

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