Assumable mortgages: Should you take over someone else’s loan?

Assuming a loan requires the mortgage lender’s approval, including a credit check.

Elissa

Elissa Suh

Published March 30, 2020

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KEY TAKEAWAYS

  • Assuming a loan allows a borrower to take over an existing mortgage

  • The borrower must still meet the lender’s creditworthiness requirements in order to qualify

  • Assumable loans are most commonly available for FHA, VA, and USDA loans

  • A borrower can benefit from mortgage assumption when current interest rates are higher than the interest rate

If you’re a homebuyer, have you ever wondered why you can’t just take over the seller’s current mortgage loan when you buy their house? When most people buy a house, they finance the purchase by taking out a mortgage. But when the seller has an assumable mortgage, they can actually transfer the mortgage to the buyer, who continues making payments based on the original loan terms.

Loan assumption can benefit a homebuyer who wants to retain the low interest rates of the original loan, which is helpful if the current mortgage rates are very high. However, assuming a mortgage isn’t for everyone. You can only assume certain types of mortgages, like FHA loans, and the mortgage lender has final say — before letting someone assume the mortgage, the lender will assess their creditworthiness.

In this article:

How does an assumable mortgage work?

In order to successfully get a mortgage assumption, the lender must agree to it. Most conventional loans are not assumable — their mortgage terms usually include a due-on-sale clause that says the entire mortgage loan must be repaid when the homeowner transfers ownership of the property. Fannie Mae and Freddie Mac may also allow for mortgage assumption for certain fixed-rate and adjustable-rate loans. Ask your lender or check your mortgage contract.

Otherwise, assumable mortgages are most commonly available for FHA mortgages, VA mortgages, and USDA loans.

People who want to get an assumable mortgage must still undergo financial assessment. The lender will look at the buyer’s credit and income to make sure the monthly payments can be made on time. FHA loans and VA loans have less stringent requirements, so you may not need too high of a credit score to qualify. Keep in mind that if you assume an FHA mortgage you may have to pay mortgage insurance for the lifetime of the loan.

If the lender approves of the mortgage assumption, then the borrower will continue to pay the mortgage, usually according to the original terms for the rest of the repayment period.

There are some closing costs when you assume a mortgage, since the lender or loan servicer must still process some paperwork, but in total, these mortgage assumption fees may not be as high those associated with taking out a new mortgage. Additionally, if you’re assuming an FHA mortgage or another government-backed loan there will be limits as to how much you can pay in closing costs.

Seller’s liability in an assumable mortgage transaction

If you’re the seller of a home with an assumable mortgage, you should ask the lender to release your mortgage liability. This way, if the buyer who assumes your mortgage does not make payments, you will not be held responsible.

In general, it’s important to involve the lender in the process so you don’t have an unofficial or unauthorized transaction that will not hold up in court or leave you footing the bill.

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Is it a good idea to get an assumable mortgage?

The main reason for a buyer to assume a mortgage is if the seller’s existing mortgage has a good interest rate — lower than what the buyer could get now based on their credit history and current market rates. Regarding the latter, today’s mortgage rates are historically low, so most people applying for a mortgage now do not have to worry as much about securing a good interest rate.

One drawback to assuming a loan is that it’s not as seamless as you might think. If your credit score or income levels are not up to par, you may not qualify. Even though the mortgage transfers between the buyer and seller, an assumable mortgage isn’t a cost-free transaction. The buyer may still owe a predetermined sum, sort of like a down payment, that must be paid in cash or covered with another loan.

Let’s say you want to buy a house for $400,000 that has an assumable mortgage. The seller’s loan balance is $300,000, which means you’ll have to pay them the remaining $100,000. If you don’t have the cash, you might have to take out another loan, like a second mortgage to pay for it. Now you’ll have to stay top of two separate mortgage payments.

If the purchase price of the house was even higher and you need to pay even more, then you might end up having to take out your own mortgage anyway, which could defeat the purpose of assuming a loan. Remember, the purpose of an assumable mortgage is to assume the original lender’s low interest rate. If you take out a second mortgage to cover the difference, the lender may extend you a loan based on current interest rates and your credit score, and the terms may not be as good as those on the seller’s existing loan. You’ll also have to pay closing costs.

Buyers who are considering an assumable loan should try to find a home in which the seller does not have a lot of equity (the loan balance you’ll assume is close to the purchase price) — so you won’t need to make any large upfront payments.

It might also be wise to pay for a title search and title insurance if you don’t trust the seller and want to make sure they have the right to sell the property.

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