Assumable Mortgage: A Guide for Homebuyers

Assuming a mortgage occurs when a buyer takes over the seller’s loan, including the terms, interest rate, and monthly payments. It is different from the traditional home purchase process, where the seller acquires a brand-new mortgage to purchase the home.

There has been a lot of discussion around assumable mortgages in recent years because of the dramatic increase in interest rates. In 2021, federal interest rates dropped below 3% but then soared above 7% in 2023. In the past year, they have remained steady at around 6%. Many buyers wish they could purchase a home with a 3% interest rate, which is why they seek out assumable mortgages.

Not all loans are assumable, and buyers still need to do their due diligence to make sure they can afford a house with an assumable mortgage. Learn more about this concept and how it can help the homebuying process.

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Which Home Loans Are Assumable?

Not all loans are assumable, and the seller should review their mortgage terms to confirm that the buyer can assume the loan should they choose to do so. However, there may be more flexibility to find assumable loans than you think.

• FHA Loans: Many first-time homeowner loans from the Federal Housing Administration (FHA) are assumable.
• VA Loans: Many Veterans Affairs loans are also assumable. However, you do not need to be an active or formal member of the military to assume a VA loan.
• USDA Loans: These loans are also assumable, but they may require a new rate and terms. These rates tend to still be favorable because they are designed to attract people to rural areas or make rural living more affordable.

Unfortunately, most conventional loans are not assumable. These are some of the most common loans across the United States. Instead, these loans have due-on-sale clauses that state the original borrower (the current seller) must repay the loan in full if they sell the property.

How to Assume a Mortgage

Assumable mortgages go through similar processes as conventional ones during the homebuying process. The buyer needs to agree to the terms, while the lender needs to agree to the assumption. The loan also goes through the underwriting process, and the buyer needs to prove their financial viability. Here’s what you can expect when assuming a mortgage.

• The lender reviews the loan’s assumability: the buyer confirms the loan is assumable with the lender and requests an assumption package to review the terms and requirements.
• The buyer submits financial documentation: just like any loan, the buyer will need to provide W-2 pay stubs, tax returns, bank statements, and other financial information to prove they qualify for the loan.
• The lender confirms the buyer can assume the loan: not only will the lender confirm they buyer can make the monthly payments, but they will also make sure that the buyer can afford any equity compensation given to the seller.
• The underwriting process begins. This is a deep dive into the buyer’s finances to confirm that the documents they submitted are accurate.
• The loan is ready to close. The buyer closes on the loan and the home. They officially transfer ownership and start the next chapter of their lives.

One of the biggest challenges of assumable mortgages is paying the seller their equity in the home. For example, if the house is worth $400,000 and the seller owes $300,000 through a VA loan, then they have $100,000 in equity. The buyer will need to pay the equity to the seller before assuming the loan. Some buyers may need to take out second mortgages to fill that cash gap.

Costs To Expect: Down Payment, Closing Fees, Interest Rates

One of the benefits of assumable mortgages is that their closing costs are less than conventional loans. Buyers will have to pay an assumption fee, which usually ranges from $500 to $1,000. There might be other fees for specific loans, but overall, the costs are less than starting from scratch.

The main difference for buyers is the equity gap payment instead of a down payment. For example, many buyers take out FHA loans with a 3.5% down payment. VA and USDA loans also have small down payment requirements. A buyer purchasing a house for a $400,000 purchase price might only need $14,000 to secure their purchase. The equity a seller has in their home could be much higher than that.

Equity compensation can vary widely depending on the seller’s original down payment and how aggressively they paid down the loan. If it is much higher, the buyer could struggle to assume the loan. This is why some buyers take out second mortgages for loan assumptions.

However, many buyers still feel the costs are worth it, especially if they can quickly pay off the second loan. Consider a buyer who needs a $300,000 loan. Using a mortgage calculator to estimate costs, a buyer would expect a monthly payment of $1,800 at a 6% interest rate, but would only pay $1,265 monthly at a 3% interest rate. This $535 monthly savings adds up. Over a 30-year term, the 3% loan is more than $192,000 cheaper. Even if the buyer assumes the mortgage several years in, they can save significantly instead of applying for a new one.

Calculating Blended Rates and Home Equity

If you intend to take out a second loan to cover the cost of the equity compensation, it’s important to confirm that you will actually save money in the long run. A high monthly payment and interest rate on your second mortgage could push you out of your affordability range and limit how much you are saving on the assumable mortgage. It might actually be cheaper to take out your own loan, especially if you qualify for FHA and VA loans, instead of assuming the seller’s existing mortgage.

You can find blended rate calculators online to give you an idea of your costs. You will also need to secure lender approval to take on multiple loans to purchase the house. Mortgage officers will calculate your debt-to-income ratio just like any loan to confirm you can afford the monthly costs associated with this deal.

Pros and Cons of Assumable Loans

Like all financial decisions, there are benefits and drawbacks to assuming a mortgage. Here are a few things to know before starting to seek lender approval.

Pros

• Enjoy a lower interest rate. One of the biggest benefits of assumable loans is the lower rates, which allow buyers to potentially save hundreds each month.
• Save on closing costs. An assumable mortgage may be a more affordable option for buyers when they add up loan costs and fees.
• Potentially pay off the house faster. If you can afford a large equity payment and the seller is several years into the loan, you might be able to pay off the mortgage sooner than you think.

Cons

• You may need a large equity payment. This payment to the seller for their equity could be much larger than any down payment you had planned. You might need to take out a second mortgage.
• These loans aren’t very common. Conventional loans are rarely assumable. This might narrow your search to houses with FHA loans and others that qualify.
• Buyers still need to complete the underwriting process. Assuming a seller’s existing mortgage isn’t always a faster purchasing option. The underwriting process could take several days or weeks to complete.

How to Find Homes With Assumable Mortgages

If you are eager to find a house with an assumable mortgage, be clear about your goals with your real estate agent. Prove that you have done the math on what you can afford if you intend to take out another mortgage, and how much of the seller’s equity you can pay off. Your Realtor should be able to identify houses that have assumable loans and fall within your budget and help you recognize signs your offer will be accepted on a house.

Consider whether you will only look at properties where assuming a mortgage is an option, or if you will also tour houses where you would apply for a new loan. Because mortgage assumption is not common except for government-backed loans, you may have an easier time finding properties with conventional mortgages, where you need to apply for a new loan. As you weigh your options, think about whether it makes sense to buy a house now or wait for a recession. Consider whether the goal is to find your dream home or purchase an affordable house with a favorable interest rate for the time being.

FastExpert is a great place to start as you search for your next house. You can also compare to better understand typical fees. Find real estate agents who are familiar with assumable mortgages and know how to find viable properties to take on these loans. The right Realtor can make the home purchase process easier while answering any questions and concerns you have.

FastExpert Can Also Help You Find Loan Officers

A quality mortgage lender can be just as valuable to buyers as their real estate agent. FastExpert now makes it easy to find loan officers who have experience with assumable mortgages. You can search for loan officers in your area who area knowledgable about your state’s laws and understand your regional dynamics. This can be especially important for buyers with unique circumstances, such as single moms buying a house who may rely on specialized assistance programs and financing options. FastExpert is a great place to start if you need a lender who can help you take over an existing loan for a home purchase.

Enter the Housing Market With Confidence

It doesn’t matter whether you are taking out a traditional mortgage, an assumed mortgage, or buying with cash, you need to feel good about the property you are purchasing and the team supporting you. If you already own a home, you may also want to learn how to sell a house with an assumable mortgage to make your property more attractive to buyers.

A trusted Realtor and lending team can help you navigate the financial hurdles needed to purchase a home with confidence.