Is an Assumable Mortgage Right for You? Mortgage Assumption: Real Estate 101 Guide

What is an Assumable Mortgage?

A mortgage assumption or assumable mortgage refers to a buyer taking over a seller’s existing mortgage on a home, rather than obtaining a new loan of their own. 

Simply put: a mortgage assumption is when an existing mortgage is transferred from the original borrower (usually the home seller) to a new borrower (usually the home buyer). 

If the seller has a home loan that is eligible for assumption, then the buyer will be able to work with their lender to complete the mortgage assumption process. Once approved, the new borrower assumes the mortgage payments and is responsible for the remaining balance of the home loan. The terms of the original mortgage - the interest rate and amount owed - would not change. 

We recommend looking into the mortgage balance, home equity, refinancing options, and type of loan on a home before you start the mortgage assumption processes.

Why would a homebuyer assume a mortgage instead of getting a new one?

There are a number of reasons why a buyer would want to assume the seller’s mortgage, including: 

• Lower interest rates: If the interest rate on the existing loan is lower than the current market’s higher interest rates, assuming a mortgage allows the buyer to take advantage of this lower rate and, therefore, decrease their monthly payments.

• Lower closing costs: When you assume a mortgage, the closing costs that are normally due-on-sale and come with getting a new mortgage are minimized. Buyers still need to come up with the down payment, but avoid some costs later on. These avoided costs include appraisal fees, loan origination fees, and title insurance, so the buyer pays less upfront. Note that in some instances there are assumption, appraisal, and funding fees associated with a mortgage assumption that would be paid by the new homeowner.

• Faster approval process: Because the buyer does not have to go through the conventional loan application process for a new loan, they will have a faster and easier process with an assumable loan.

• Easier qualification criteria: Great for buyers who have a lower credit score or a high amount of debt, as these factors will make it difficult for them to qualify for conventional mortgages. Assuming a mortgage is easier to qualify for as the buyer only has to show that they can make the monthly payments on the principal balance of the loan.

Assuming a mortgage is a popular option for buyers looking for lower interest rates and especially in markets where the mortgage loan interest rates have spiked in recent months. Assumable mortgages are also popular amongst buyers wanting lower closing costs, or those who might have difficulty qualifying for a conventional mortgage loan due to a high debt-to-income ratio.

Assuming a Mortgage: The Process to Homeownership

The key people involved in a mortgage assumption are the mortgage lender for underwriting, the current mortgage loan borrower (usually the seller), and the new loan borrower (usually the new homeowner). All parties must cooperate and agree to the assumption of the loan in order for the homebuyer to take it over. Sellers agree to the release of liability of the loan and pass this responsibility on to the new homeowner.

If you are interested in doing a mortgage assumption, be sure to check with your lender that the seller’s mortgage is assumable. We also recommend meeting with your lender to discuss any other potential closing costs associated with the mortgage assumption and to make sure you match all qualifying criteria for the loan (if applicable). 

For more information on loan terms, and other criteria for assumable mortgages, be sure to check out the Fannie Mae website as well as the FHA mortgages and NMLS sites.

Top 5 things homebuyers should know about an assumable loan:

1. Not all mortgages are assumable so it's important to check eligibility requirements with a lender. Generally speaking: Federal Housing Administration (FHA) and U.S. Department of Veteran Affairs (VA) mortgages are assumable. United States Department of Agriculture (USDA) and adjustable rate mortgages (ARMs) may not be assumable
2. Creditworthiness must be demonstrated by the borrower to the lender in order to assume a mortgage
3. Assumption fees and appraisal fees are to be expected when assuming a mortgage, but they vary depending on your lender and specific mortgage loans 
4. The new borrower takes responsibility for the remaining balance of the mortgage loan
5. Original homeowner must be released from liability at the time of mortgage being assumed by new borrower, meaning the original borrower is no longer obligated to repay the loan balance

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