• Assumable mortgages are home loans someone else can take over, freeing the original borrower from repaying the home loan.
• Only government-backed mortgages can be assumed since many conventional loans have a due-on-sale clause.
• Taking over a mortgage can save money for a new homeowner if the loan’s interest rate is much lower than the current rate.
• Unlike refinancing, an assumption doesn’t create a new home loan, but a second mortgage may be necessary to cover the original owner’s existing equity.

Most government-backed programs, such as FHA loans, USDA loans, or VA loans, count as assumable mortgages.

Unlike government-backed loans, conventional mortgages usually don’t allow assumption[1]. They often have a due-on-sale clause, which requires full payment of the mortgage balance when the property is sold.

No new home loan is created when assuming a mortgage, even though the property changes ownership. Everything stays the same apart from the borrower’s name on the mortgage documents. The buyer picks up the payments where the seller left off and continues them until the loan is fully paid.

Assuming a mortgage is not a form of refinancing, however. Refinancing involves paying off the old home loan using funds from the new one without transferring the ownership of the house to another. In this scenario, the buyer may negotiate the new loan’s terms.

When considering a loan assumption agreement, the seller and buyer should talk with the lender to ensure everyone is on the same page. Otherwise, the seller may still be liable for the debt if the buyer fails to pay; some lenders can even ask for the full amount immediately if they discover this unauthorized transaction.

To successfully assume a mortgage, the buyer must pass the same qualifications as getting a new home loan. When a buyer meets the lender’s requirements for credit, income, and employment, they can assume the mortgage, releasing the seller from liability.

If a spouse dies or there’s a divorce, the person taking over the mortgage still has to show the lender they can pay the loan, even if their name is already on the loan. The lender will need to check again, as they might have initially approved the loan based on the combined incomes of both spouses[2].

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Costs

For FHA or USDA home loans, the buyer usually just pays the difference between the purchase price and the outstanding loan balance.

For VA mortgages, there may be a funding fee of 0.5% of the loan amount[3].

Timeline

Closing an assumable mortgage may take more time than a typical conventional loan. This is because the process includes making sure the application meets both lender standards and government insurance requirements[4].

If an appraisal isn’t needed, it can save a week or two[5] in the closing process. If the buyer’s documents are in order, everyone can move forward to settlement in about 45 days[6].

BY THE NUMBERS: On average, the closing timeline of FHA and VA mortgages ranges from 57 to 58 days, which is about a week longer than that of conventional home loans.

Source: Urban Institute

An assumable mortgage has benefits and risks for both the buyer and the seller. Here’s a quick rundown.

Pros

For the buyer, taking over a home loan with an interest rate lower than the current rate can save money in the long run. Also, assumable mortgages don’t always require an appraisal, which can reduce closing costs significantly.

For the seller, letting buyers assume their existing mortgage may speed up the home sale. This can also give the seller the chance to negotiate a higher selling price.

Additionally, letting someone else take over the mortgage can help the seller avoid foreclosure. Handing off the debt to another person can lessen the risk of default[7].

If an owner struggles with mortgage payments after inheriting a property or getting it through a divorce or family transfer, modifying the loan with an assumption clause may help them keep the house[8].

Cons

For the buyer, taking over someone else’s home loan may require a sizeable down payment. Since this amount is the difference between the house price and the remaining mortgage debt, the seller may set a higher price to cash in on the home equity[9] they’ve built.

Because not everyone has that much money, an interested buyer may need a second mortgage[10] to afford it.

Plus, those who want to assume a mortgage have limited choices because only government-backed mortgages can be assumed. For instance, if someone takes over an FHA loan, they’ll have to make monthly mortgage insurance payments until they refinance the loan.

For the seller, having someone else assume a VA home loan can harm their entitlement[11]. That’s the money the government promises to cover if the borrower defaults.
If the seller doesn’t find a buyer who’s an active military member or a veteran, this entitlement might stay tied to the VA home loan. Without the entitlement, the seller may not qualify for another VA loan in the future.

BY THE NUMBERS: Only 18% of all mortgages in the U.S. are government-insured home loans.

Sources: MoneyGeek

1. Zhu, K. (2021, October 11.) Assumable Mortgages: When Can You Transfer Home Loans? ValuePenguin. Retrieved from https://www.valuepenguin.com/mortgages/mortgage-loan-assumption
2. Huffman, M. (2012, April 9.) Why Both Spouses’ Names Should Be on the Mortgage. ConsumerAffairs. Retrieved from https://www.consumeraffairs.com/news04/2012/04/why-both-spouses-names-should-be-on-the-mortgage.html
3. VA funding fee and loan closing costs. (2022, November 10.) U.S. Department of Veteran Affairs. Retrieved from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
4. Kielar, H. (2022, November 23.) How Long Does Underwriting Take? A Timeline. Rocket Mortgage. Retrieved from https://www.rocketmortgage.com/learn/how-long-from-underwriting-to-closing
5. Levinson, C. (2022, July 14.) How long does a home appraisal take? Opendoor. Retrieved from https://www.opendoor.com/articles/how-long-does-an-appraisal-take
6. How a Mortgage Assumption Agreement Works and How to Get One. (2022, September 28.) American Financing. Retrieve from https://www.americanfinancing.net/mortgage-basics/mortgage-assumption-agreement
7. Martin, A. (2022, January 6.) What You Need to Know About Mortgage Default. Experian. Retrieved from https://www.experian.com/blogs/ask-experian/what-to-know-about-mortgage-default/
8. Loftsgordon, A. (2022, December 2.) Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage? Nolo. Retrieved from https://www.nolo.com/legal-encyclopedia/avoiding-foreclosure-can-someone-else-assume-take-over-the-mortgage.html
9. Understanding your home’s equity. (n.d.) My Home by Freddie Mac. Retrieved from https://myhome.freddiemac.com/owning/equity-and-appreciation
10. What is a second mortgage loan or “junior-lien”? (2020, September 4.) Consumer Financial Protection Bureau. Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-a-second-mortgage-loan-or-junior-lien-en-105/
11. Bermudez, R. (2022, August 17.) Understanding Your VA Loan Entitlement. LendingTree. Retrieved from https://www.lendingtree.com/home/va/understanding-the-va-loan-bonus-entitlement/